Credit Recovery Made Easy: Why Debt Consolidation Is Key

Debt consolidation offers people swimming in debt a lifeboat—a truly workable solution for managing and recovering from stressful financial situations. It can also help people who want to boost their credit forge a path through credit recovery. 

How does it work? Is it a good option for you? Wondering, “Will debt consolidation help my credit?” And how can you get started as soon as possible? 

We’ve got answers. Let’s get started.

The Many Advantages of Debt Consolidation When Done Well

After consolidating your debt, if you handle the process well, you’ll experience several compelling benefits.

Just a few of these benefits are:

• Lower interest rates: In many cases, consolidating your debt under a new loan or on a specific credit card can get you a lower interest rate, which can reduce the amount you'll spend on this debt over time.
• Reduced monthly payments: Debt consolidation can result in smaller regular bills, which can ease strain on your monthly finances.
• The convenience of working with a single creditor: Even if the total amount of money you’re responsible for repaying remains the same, working with just one creditor instead of many will be easier on your brain.

Between these and other perks, consolidating your debt can help you feel like you’re back in control of your finances.

Know This Before Getting Started: A Closer Look at Interest Rates and Payments

If you’re interested in benefiting as much as possible from debt consolidation, it’s a good idea to understand what you’re getting into. Let’s take a quick glance at interest rates and payments to see how they might influence your decision.

Debt Consolidation's Possible Impact on Your Credit Score

Getting a credit card from a credit union can come with serious benefits over working with a typical bank. 

When you consolidate, you’re shuffling your debts around. Depending on how you do so—for example, if you open a new credit card and then perform a balance transfer—this can improve your credit utilization ratio, which may positively impact your credit score. 

Making your debt payments on time can improve your score, too. This can be a lot easier if you consolidate a few monthly debt payments into one. 

However, it’s important to move carefully and keep tabs on all your accounts as you consolidate. If you accidentally miss a payment on an account before it closes, that can negatively impact your score. Any hard credit inquiries that you amass as you consolidate can temporarily ding your credit.

The Many Types of Debt Consolidation and Strategies

Of course, the way you benefit from debt consolidation will depend on the specific route you take. Some options include: 

• Balance transfers: This involves moving debt from many credit cards to just one—preferably one with a lower interest rate. This may be a good option for those with high card balances, especially if you can take advantage of an introductory period of low interest on your new credit card. 

• Unsecured personal loans: Alternatively, you could take out a personal loan and use it to pay down your other debts, effectively consolidating all of your debts into one loan with a fixed interest rate and repayment term. If you have good credit and can obtain a favorable interest rate, this may be worth looking into.

• Secured loans (HELOCs or mortgage refinances): Home equity lines of credit and mortgage refinances offer you the ability to take out a loan to consolidate debt while using your home as collateral. They can offer low interest rates. If you’re a homeowner with significant equity in your home, this may be a good option. However, be aware that you’re putting up your home as collateral, which means you’re risking your home if you default on the loan.

Each consolidation strategy carries its own risks and benefits. As you consider debt consolidation, it’s essential to do research to select the option best suited to you and your financial goals. 

Beyond Consolidation: Cultivating Smart Financial Habits with the Help of iQ

Debt consolidation can be an important asset in your credit recovery tool kit. Cultivating responsible financial habits is also crucial if you’re interested in long-term financial health. 

After consolidating your debts, consider implementing a budget and prioritizing avoiding new debt. 

Interested in working with the friendly financial professionals at your credit union as you pursue credit recovery and your financial goals? Book an appointment on our website, and we’ll help you analyze your financial landscape and identify the best consolidation strategy for you. And, while you’re here, check out our competitive interest rates to see whether we can assist with a strategic balance transfer.