One of the hard knocks of life is the burden of debt—especially when it becomes too much to handle. But paying off debt is no easy feat.
With the average credit card interest rate at around 22.51% as of July, according to the Credit Card Landscape Report by WalletHub, you might be looking into consolidating your debt.
Is it a good idea to consolidate debt with a personal loan?
While a personal loan can seem attractive (as long as you can get a lower interest rate) it really depends on your level of debt and credit score to make it worth it. If you have a good credit score, you’ll have a better chance of taking out a personal loan and getting better interest rates.
However, it’s important to remember you’ll be taking out a new line of credit, which means a hard inquiry will ding your credit score. And if you plan to continue the same spending habits that put you into debt, a personal loan probably isn’t your best option.
Should you consolidate debt with a debt management program (DMP) instead?
Yes, especially if you’ve fallen behind on payments and have an average or lower credit score. In our experience, credit scores before enrolling in a DMP land around 605. You’ll need at least 670 or higher, if you want to get a personal loan with lower interest rates and the best terms.
What is a debt management program?
Credit counseling agencies offer debt management programs, so you can consolidate your loans into one (typically, lower) monthly payment to be paid off in three to five years. Counselors will work with your creditors to get to lower your interest rates. In our experience, before enrolling in a DMP, client APRs average 22%, but after enrolling, the average is 6.8%—a significant drop.
If you’re paying just the minimum on a high-interest card, you are barely paying the interest, let alone the card off. With a DMP, you’re not opening a new line of credit, and you don’t have to worry about your score taking a hit.
Instead, as you pay down your debt and make on-time payments to your creditors, your credit score will only improve.