Having multiple debts with different interest rates, payments and due dates can make managing your finances challenging. Fortunately, you may be able to simplify your debt payments by using a debt consolidation method. But before you do, understand the pros and cons of each approach to debt consolidation so you can determine if this strategy is right for you.
The primary benefit of debt consolidation is lowering your interest rate. This can help you pay off your debt faster, saving you money in the long run. You can do this by conducting a credit card balance transfer to a new 0% APR card, refinancing your mortgage with a lender that offers low interest rates, or taking out a personal loan with a lower rate.
To qualify for a new loan with lower rates, you must have sufficient income to cover the monthly payment as well as your debts’ current interest costs. This calculation is known as your debt-to-income ratio or DTI. A DTI that is 43% or lower is considered good and could allow you to qualify for an Albuquerque debt consolidation loan with competitive rates.
Most lenders charge a fee to process and approve loans. However, many credit unions offer a no-fee approach to debt consolidation for members. This allows you to minimize the cost of your debt consolidation while also enjoying the additional benefits of membership.
You may have to provide supporting documents when applying for a debt consolidation loan, such as paystubs or bank statements, but you’ll likely get a more personalized service from credit unions than banks or other lenders. You’ll also be more likely to qualify for a debt consolidation loan with less strict requirements than you would at other institutions.
While the goal of debt consolidation is to lower your overall cost of borrowing, it’s important to note that your new loan account will be reported to the credit bureaus. This will have a direct impact on your credit score. The amount of impact will depend on how much you borrow and how you manage your new loan account.
The main ways to consolidate debt are through a balance transfer credit card, a personal loan, or a home equity loan with a HELOC. In most cases, you’ll need a high credit score to qualify for these loans and obtain a competitive interest rate. The addition of a new credit card account or loan will decrease your total available credit and may shorten your average credit history, which counts for 15% of your score. In such cases, it’s best to keep your unused credit cards open after debt consolidation and avoid closing them altogether. Contact a New Mexico debt relief today to learn more about how they can help you get a fresh start.