When you are trying to get out of debt, it can be hard to know where to start. There are so many options for debt consolidation that it can be challenging to decide which is best for your financial situation. Even worse, the amount of untrue debt consolidation myths out there makes things even more overwhelming. When it comes to debt consolidation, what’s true and what isn’t? Here are the most popular myths we’ve seen and the real truth.
Myth 1: You’ll end up in more debt than before with a consolidation loan
The truth: A consolidation loan can actually help you reduce the total amount of your debt. This is because it combines multiple smaller loans into one larger loan, which means you will have less interest to pay overall. In addition, a consolidation loan can give you more time to pay off your debt and make it easier to manage.
However, there is a caveat to this: You can get into more debt if you don’t stop your old spending habits. If you aren’t careful, a consolidation loan can increase your overall debt burden.
So, while a consolidation loan can help you reduce your debt, it’s important to be smart about it and make sure you still have enough money left over to cover your other costs.
Myth 2: A consolidation loan is only for people with high-interest debt
The truth: Anyone can take out a consolidation loan. In fact, most people who take out a consolidation loan have low or moderate interest rates. This is because the main purpose of a consolidation loan is to reduce the total amount of your debt, not to pay off high-interest debt first.
Therefore, even if you have high-interest debt, a consolidation loan could be a good option for you.
Myth 3: Your credit score will be destroyed if you take a debt consolidation loan
The truth: Many people believe that taking a debt consolidation loan will damage their credit score when the opposite is true. This myth most likely stems from the fact that your credit will have a “hard pull” or “hard inquiry” added to it, which just means that a financial institution requested your full credit report for the purpose of deciding whether or not to lend you money.
While it is true that having multiple hard inquiries will lower your score slightly, the benefits of your consolidation loan will more than cancel this out. This is due to how credit scores are determined: different factors that affect your credit are weighed differently.
A hard pull generally accounts for 10% of your total score. Your Credit Utilization Ratio, however, accounts for around 30% (depending on the reporting bureau). By lowering your utilization with a consolidation loan, you’ll notice a boost in your score that outweighs any damage from the hard pull.
Myth 4: Debt consolidation loans are impossible to get if you have bad credit
The truth: In most cases, you don’t need good credit to get a debt consolidation loan. This is because the main purpose of a debt consolidation loan is to help you reduce your overall debt burden, not to lend money for frivolous spending or to buy appreciating assets.
Therefore, if you have bad credit, it’s not impossible to get a loan – you just need to make sure you qualify for one.
The most important thing is to stay informed about the different debt consolidation options available and choose the best for your situation. Doing so can avoid some common debt consolidation myths and get back on track to getting out of debt.
The bottom line
The reality is that debt consolidation can actually help you reduce your overall debt burden. If done correctly, it can even improve your credit score. And while interest rates may be higher than with individual loans, they’re still much lower than the interest on the original debts, so it’s always worth considering debt consolidation to help you get your finances back on track.