Debt consolidation is the process of taking out a large, low-interest loan and using that money to pay off several smaller, high-interest debts. You can consolidate debt yourself by applying for a loan directly with a bank, or you can go through a company specializing in consolidation. If done correctly, debt consolidation can improve your husband's credit score. If done incorrectly, it can be financially devastating and ruin his credit history for years to come.
When Not to Consolidate
If you're thinking about debt consolidation, you've probably seen those commercials promising to save you money by combining all your debt into one easy monthly payment. It sounds too good to be true and, for many people, it is. If you are heavily in debt and behind on your payments, you are not going to get a low-interest loan. Most likely, you will get a loan with an APR of 20 percent or more, plus massive fees. To get a low interest rate, you will need to have a good credit history or put your house up as collateral. If you are not in a position to do this, debt consolidation is not a good option. You are likely to end up owing more than you do now -- and end up with a lower credit score as well.
When to Consolidate
There are several good reasons for consolidating your debt. It's much easier to keep track of a single monthly repayment than a dozen smaller ones, each with a different due date. If your credit history is healthy, but you find yourself with high-interest debt, you may be able to get a loan at a significantly lower rate. If you're sure that you can keep up with the payments, you can reduce that rate further by getting a secured loan, using your house as collateral. By managing the loan well, you can actually improve your credit score over time.
Doing it Yourself
It's tempting to use a debt consolidation service to sort out your financial matters, but it's also expensive. Fees can be as high as 10 percent, money that you cannot afford to waste. Even the not-for-profit companies have to earn their money somehow. Instead of charging you, they charge lenders. The lenders pass those fees on to you. If you think you can qualify for a low-interest loan, talk to your bank yourself. You can save thousands of dollars and get a much better deal. If your bank refuses you a loan, debt consolidation is not for you. Any loan you get through a debt consolidation service will not be a good deal.
Alternatives
There are other ways to pay off debt that do not involve the risks associated with debt consolidation. Make sure you make at least the minimum monthly payment on all debts. This will help your credit score. Whenever possible, pay more than the minimum. Focus on the high-interest, expensive debts before moving on to the lower-interest ones. By paying off your debt, you are decreasing your debt-to-credit ratio and raising your credit score. If you find yourself falling behind on payments, don't hesitate to contact the lender and request an affordable payment plan. Lenders would rather get their money back slowly than have you default on the entire debt.
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