Debt consolidation is taking out a single loan to pay off multiple balances. For example, if you are carrying balances on credit cards or have medical bills, you can combine the total debt into one loan. You may even secure a lower interest rate than you were paying on your other loans. Plus, you could enjoy the convenience of making one monthly payment.
When you consolidate debt, you make one payment each month instead of tracking and managing several payments and due dates.
Instead of paying high rates across multiple cards and not seeing your total balance decrease significantly, debt consolidation means you’re putting your payments for the month toward one loan, which may allow you to pay your balance down more quickly.
When you consolidate debt, you can usually secure a lower interest rate than the average rate you’re paying across your other credit cards.
You can consolidate unsecured debt, loans that are not backed by collateral. For example, you may choose to consolidate credit card debt, medical expenses, department store cards/accounts, and other personal loans. You cannot consolidate student loans or secured debt, like mortgages or vehicles.
Consolidating your debt can reduce the number of payments you’re required to make monthly. You don’t have to consolidate all your debt –only the ones that make sense for you. For example, if you’re paying a low interest rate on a loan or card, it may not make sense to consolidate that balance.
Debt consolidation has the potential to improve your credit score, because it can reduce your utilization rates on your cards and because your on-time loan payments will be reported to the credit bureaus.
As with almost any loan, debt consolidation may require a credit inquiry, which may have a temporary impact on your credit score.
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