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Debt Consolidation Tips for the New Year

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The new year is a time to review and refresh. For many people, it is an excellent opportunity to gain control of their finances. American consumer debt, which includes mortgages, credit cards, and auto loans, increased by 2.2% in the third quarter of 2022, reaching a total of $16.51 trillion. Debt consolidation can help.

What Is Debt Consolidation?

Debt consolidation refers to the process of merging multiple debts into a single repayment vehicle, including the following:
  • Credit-card balances
  • Auto loans
  • Medical debt
  • Personal loans
  • Student loans
Combining these bills can simplify your financial strategy, but it's important to evaluate the benefits and drawbacks, to determine whether debt consolidation is right for you.

Pros and Cons of Debt Consolidation

A credit union debt consolidation loan is one of the best ways to streamline your finances and meet your immediate budgeting needs, offering these top benefits:
  • Paying off debt faster. Oftentimes, a debt consolidation loan can fast-track your total payoff. For example, credit cards don’t set a timeline for paying off a balance. On the other hand, with a debt consolidation loan, you know your fixed monthly payment upfront, and there is a beginning and end to those payments.
  • Receiving a lower interest rate. You could receive a significantly lower rate with a consolidation loan, particularly if your debt is from credit cards. According to the Federal Reserve, the revolving credit rate increased to 16.9% in November 2022.
  • Simplifying your finances. Multiple due dates and varying payment amounts are two things you'll no longer have to worry about — a single payment will address all your debt.
Before taking out a loan, however, there are a few things you should consider when weighing the pros and cons of debt consolidation:
  • Reviewing lingering financial problems. Consolidating debt is an extremely helpful step but will not keep you from falling into financial trouble in the future. Staying out of debt permanently requires changing the habits that have promoted overspending.
  • Keeping up with payments. You might be wondering how to consolidate credit card debt without hurting your credit score. Your credit union will offer immediate help with any debt consolidation loan, but you have to ensure you can afford the monthly payments. Delayed payments will result in late fees and potentially other charges. Worse, those late payments will be reported to credit bureaus after 30 days past due, which can negatively impact your credit score.
What to Look for When Consolidating Debt

Ready to explore your debt consolidation options? Before applying, here are some steps to take:
  • Review your credit score and reports. Your credit score and financial history largely determine the terms and rates you’ll receive on a consolidation loan. Make sure you meet your lender’s minimum credit-score requirements before applying. You can receive a free annual copy of your credit report and work to improve your score if necessary.
  • Decide how much you need. Calculate the sum of the debt you wish to consolidate, to determine the amount you will need to borrow. Tools such as a Debt Consolidation Calculator are a great place to start.
  • Prepare for a drop in your credit score. When you apply for and receive credit, your lender will check your credit and history, which will temporarily lower your score.
  • Make a repayment plan. Consider what habits could not only help you repay your debt but also enhance your financial outlook. Creating a budget, making extra payments, setting up automatic payments, and reducing spending are all possible ways to do this.
Power Financial Credit Union Can Help

Working with a reputable lender is the first step in reshaping your finances and addressing your debt. If you have questions about how to consolidate payments, contact Power Financial Credit Union today. We'll discuss your options and create a loan solution designed to improve your financial future from day one.