There are several potential benefits associated with debt consolidation. Taking this step allows you to combine multiple debts into a single monthly payment, simplifying your finances and making life easier. Consolidation can also result in a lower interest rate on your debt, which will have long-term benefits.
Pros for consolidating your debt
Cut your interest charges: The average individual has 3.8 credit cards—and interest rates. Not to mention car payments, medical bills, mortgages, and student loans. By settling high-interest debts with a lower-interest loan, you can reduce the money you burn in interest.
Debt consolidation — combining multiple debt balances into one new loan — is likely to raise your credit scores over the long term if you use it to pay off debt. But it's possible you'll see a decline in your credit scores at first. That can be OK, as long as you make payments on time and don't rack up more debt.]
Cons of Debt Consolidation
Debt consolidation rolls multiple debts, typically high-interest debt such as credit card bills, into a single payment. Debt consolidation might be a good idea for you if you can get a lower interest rate. That will help you reduce your total debt and reorganize it so you can pay it off faster.
Trying to consolidate debt with bad credit is not a great idea. If your credit rating is low, it's hard to get a low-interest loan to consolidate debts, and while it might feel nice to have only one loan payment, debt consolidation with a high-interest loan can make your financial situation worse instead of better.
Making one late payment on a debt consolidation loan will have negative consequences. You will not only be charged a late fee, but you the interest rate on your loan will increase, which will also increase your monthly payment amount.
If the settled debt has no history of late payments—called delinquencies—the account will remain on the credit report for seven years from the date it was reported settled.
Generally, the lower your credit score, the higher the interest rates lenders will offer you on financing. To qualify for a debt consolidation loan, you'll have to meet the lender's minimum requirement. This is often in the mid-600 range, although some bad-credit lenders may accept scores as low as 580.
So, you probably can buy a house right after consolidating debt, but you may not want to. Rather, it's best to consolidate your debts well in advance so that you can improve your credit and reduce your existing debt load as much as possible before you begin the home-buying process.
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