(NewsNation) — Americans are spending more money on certain things like holiday shopping, data shows, even as inflation remains a top concern. Some are spending money they don’t have.
Nearly one in three gift-givers expect to go into debt this holiday season. Black Friday sales broke records this year despite inflation. And holiday shopping turnout will break records this year, too, according to the National Retail Federation.
Anyone dealing with debt they can’t manage may consider debt consolidation. But when is it a good idea?
What is debt consolidation?
Debt consolidation is the process of combining your debts into one, leaving you with one payment, which can be easier to manage.
There are two ways to achieve this: Balance transfer cards or debt consolidation loans.
A balance transfer is a refinancing method that allows you to move debt from a high-interest credit card to a new card with a lower rate, often a 0% interest rate for a temporary time.
With a debt consolidation loan, you apply for a new loan from a bank, credit union or online lender, and the money from this loan will pay off your other debts. You will be responsible for paying back the new loan over two to seven years.
What are the pros of debt consolidation?
- Lower interest rates: Balance transfer cards often offer a 0% interest rate for 12 or more months, which allows you to pay back your debt interest-free. Consolidation loans also usually offer lower interest rates.
- Credit score improvement: Applying for debt consolidation will require a credit score check, which impacts your score but very minimally. However, consolidating your debt into one source can greatly benefit your credit score by lowering your credit utilization rate (the amount of credit used versus the total credit you have).
- One payment date: Instead of paying multiple balances to multiple creditors in one month, often across different due dates, you will have to pay back only one creditor under debt consolidation. Be sure to always make the minimum monthly payment on time.
Overall, debt consolidation may be a good idea if you’re looking to pay off debt faster and at a lower cost.
What are the cons of debt consolidation?
- Transfer fees: Balance transfers typically have a 3% to 5% transfer fee of the total balance. Once the promotional period of no interest is up, you will pay the regular annual percentage rate, so it’s a good idea to attempt to pay off the balance before then.
- Minimum credit score to apply for a transfer or loan: To qualify for a balance transfer, consumers usually will need a good credit score of 690 or higher. Consolidation loans will require a credit check, but people with poor credit tend to have options to secure debt consolidation loans.
- Not a permanent solution: While this can be a step in the right direction for someone trying to get a handle on their finances, debt consolidation is simply a tool to manage debt; it does not erase debt. Avoid overspending and always make on-time payments.
There are upfront costs associated with debt consolidation, and you generally need a good credit score to get approved.
