You and your significant other have committed in a major way -- maybe by tying the knot, maybe by moving in together -- and now the inevitable merging of finances must commence. If one half of the couple (or even both halves) has a less-than-stellar credit history, debt consolidation might make sense. It can shore up your financial position now so that when children or major purchases come later, the credit cost will be significantly lower.
What Is Debt Consolidation?
In its simplest sense, debt consolidation is the transfer of several high-interest credit accounts into a single account with a lower interest rate. A typical example includes rolling three or four credit-card accounts into a single personal loan, at a lower interest rate and for a fixed term.
What Are the Benefits?
The major benefit to consolidation is that you will have a lower monthly payment and only one or two bills instead of several bills. For consumers with abysmal credit, consolidation can improve their credit scores by reducing the number of open accounts or open credit balances.
For people who can swing it, a home equity loan may be a good consolidation option. These loans are secured and have lower interest rates than unsecured loans, and depending on the owner's equity they may allow the most access to additional funds. Be careful, however -- if you fail to pay off your home equity loan, you may put yourself at risk of losing your home. The next best option is a personal loan, although people with bad credit might have a hard time getting one. In fact, it's entirely possible that the long-term costs of a high-interest personal loan may be higher than just slogging through the credit card debt. If one half of the happy couple has solid credit, consider a joint credit application for a new card or personal loan, and use this to consolidate the balances of other existing debts.
People with bad credit may find it difficult to get low interest rates on personal consolidation loans. More importantly, people with bad credit sometimes got into that predicament because of lax financial discipline. Although debt consolidation can lead to higher credit scores over time, the behavior that caused the high debt and bad credit must be corrected. Consolidating the debts on those credit cards and then charging them up again doesn't help -- it just leaves you with double the debt and double the misery.
Debt consolidation sounds like a good way to rebuild a financial future. Done wisely, it can be, but beware the pitfalls. Financial adviser Dave Ramsey, for example, thinks most debt consolidation is a "con" because a commercial debt-consolidation company may get you lower monthly payments and interest rates, but over a longer period -- thus causing you to pay even more in the long run, and providing a tidy profit for the consolidator. Moral of the story: Manage your own consolidation if you can, to keep your long-term interest costs low.