Debt Consolidation and Its Impact on Your Finances
posted on Friday, February 17, 2023 in Financial Tips
Debt consolidation is the process of taking a new loan to pay off multiple debts. Most of the time, borrowers with high-interest loans do this to help improve their credit scores and settle their debts.
This method of rolling your debts into a single payment can help you in the long run. However, before anything, it’s important to know how it can impact your finances. Here are some facts:
Consolidating Your Loans May Temporarily Hurt Your Credit Score
Since you’re taking in new debt to pay off another one, your credit score can be temporarily hurt by 10 points. When you apply, your lender will conduct a hard inquiry or an examination of your credit history. However, in the long run, consolidating your debts may have a positive effect on your credit score. If you consistently pay on time, your score will eventually improve significantly.
Consolidating Your Loans Can Lower Your Interest Rate
Once you see that your current credit score has improved after consolidating your debts, you might be able to decrease your overall interest rate. Lower interest can help you save money, especially with a long-term loan.
However, some debts will have a higher interest rate than others. If you’re planning to consolidate multiple debts with a single loan, do keep in mind that some of the rates will be lower, while others could be higher.
Consolidating Can Help Streamline Your Payments
Since you’ll combine multiple debts into one single loan, it will help you lower the payments you’ll have to prioritize. You also won’t have to worry about the different due dates and interest rates. Similarly, it will help you plan out when your debt will be paid off completely. Furthermore, your payments will be the same every month, allowing you to exactly know how much money you’ll need for it.
As you can see, if you have multiple debts and want to finish paying them all off on time, debt consolidation can help you with your finances. If you need insights or financial education on this matter, contact us at Community 1st Credit Union. Our expert C1st representatives can help you achieve your financial goals in life.