Financial Advice Q&A

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natachamelani
Posts: 2
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Debt consolidation, is it for me?
[ Edited ]

Good Afternoon, I had a question regarding debt consolidation. I have accumulated roughly $14,000 in credit card debt. I no longer use the credit card because of the debt, but I do make monthly payments. I thought about using a consolidator so that I can alleviate the debt fast and hopefully with little to no interest. Thanks for your time.

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Community Manager
ScottHalliwell
Posts: 886

Thanks for the question! I appreciate the opportunity to offer my thoughts on this for you. As I'm rather fond of saying, I think debt consolidation loans are a lot like dynamite. In the right hands, each can do great things. In the wrong hands, each can be really dangerous. So what is right (or correct) debt consolidation use versus wrong (or incorrect) use?

To me, correct debt consolidation usage starts with making sure that whatever caused the debt to happen in the first place has been fixed.

Typically this involves two steps:

  1. Putting a firm budget in place to help ensure you don't overspend in the future. 
  2. Building a sufficient emergency fund so that when the unexpected happens you have cash to pay for it rather than sinking further in debt. 

 

If these haven't been done (or can't be for some reason) it's usually only a matter of time until the original debts are run up again leaving with you with twice the debt burden. Consequently, I would generally shy away from consolidating until or unless you can get a budget and emergency fund in place. 

Need More Help?

Check out the Manage Your Money section of usaa.com for additional debt management tips, tools, and ideas.

 

Also, I'd like to take a quick minute to address your comment about wanting to use a consolidation loan to help you alleviate the debt off fast with little or no interest. While a debt consolidation loan can sometimes help you pay off debt faster and reduce your interest expense, the fact is, it's still going to take quite a while to get rid of the debt and you'll still incur a lot of interest expense in the process. Here's why.

When a lender issues a consolidation loan (or any loan for that matter), they're taking a risk that their money won't be repaid. To compensate them for that risk, they charge interest. Generally speaking, the higher the risk to the lender, the higher the interest charged. So, depending on your credit score, debt to income ratio, and several other factors, even though a consolidation loan can be a lower cost way to eliminate credit card debt, it's still going to cost you.

Thanks again for your question. I hope this information is helpful and I wish you all the best!

Scott

 

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