Rumors about debt consolidation loans can be dangerous. For example, some people spread the idea that consolidation can eliminate your debt, guarantee you a lower interest rate, or kill your credit score.
If you’re considering consolidation to help pay off debt, it’s important to know fact from fiction. Here are 5 debt consolidation myths you shouldn’t fall for. Keep reading to learn the cold, hard truth about consolidation.
What is debt consolidation?
Debt consolidation is when you take out a single loan to pay off multiple debt amounts. Debt consolidation can both simplify bill paying—since you only need to worry about one payment per month—and allow to you to secure a lower interest rate.
Is debt consolidation a good choice for me?
Debt consolidation might be a good choice for you if you can get a lower interest rate than what you currently have, and if you have a consistent cash-flow and responsible spending habits.
Debt consolidation myths
1. It will decrease your debt
A debt consolidation loan doesn’t pay off your debt as much as it reorganizes it. You’ll receive money to pay off your existing debt through the loan, but you’ll still need to make payments toward that loan. The idea that consolidation will somehow just eliminate your debt is a pipe dream.
2. It will land you deeper in debt
Another rumor is that debt consolidation will force you deeper into debt. Debt consolidation loans shouldn’t increase your debt—assuming you have positive financial habits, like paying your loans back on-time and in full. However, if you don’t work on improving the spending habits that got you into debt in the first place, debt consolidation won’t help you.
3. It will save you in interest
If you have a good or excellent credit score, you’ll likely qualify for a low interest rate. However, if your credit score is less than stellar, you probably won’t qualify for a low interest rate when you try to consolidate.
4. It will damage your credit score
Debt consolidation will not hurt your credit score. While applying for a new loan may result in a hard pull of your credit report, which can temporarily ding your score, debt consolidation can actually boost your score. After all, consolidating can help you reduce your debt and lower your credit utilization ratio. The overall positive effects should outweigh the short-term drop in your credit score.
5. It’s very time consuming
Debt consolidation is not a time-consuming practice. In fact, you might be able to apply for a debt consolidation online and receive a quick approval. And if you prepare your documents ahead of time, like your bank statements and pay stubs, the process will go by even faster.
Debt consolidation is not a panacea for all debt woes, but it can provide a payoff blueprint for you to follow to save money and make bill-paying easier. Just remember to avoid the debt consolidation watercooler gossip—you now know how to separate consolidation fact from fiction.
By Stefanie Gordon
Stefanie Gordon is a content strategist with over a decade of professional writing experience. She is a former financial journalist who has spent the last several years working in digital marketing. She specializes in content strategy and creation for large and small businesses in finance and technology.