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By Gina Gallagher | Citizens Bank Contributor
Student loans. Auto loans. Mortgages. Borrowing has become a way to finance our dreams. But there’s that other side of borrowing that can give us anxiety — carrying high-interest credit card and other revolving debt.
If you find yourself in that situation, you’re not alone. According to data compiled by Fortunly, the total revolving U.S. consumer debt is over $1 trillion, and the average credit card debt of the American consumer is $6,354.
What’s a person who wants to take control of their debt situation to do? One solution is to consolidate high-interest debt with a personal loan. But there are a lot of misconceptions about what’s involved with debt consolidation. Here are five common ones:
If you’re looking to have your debt magically disappear, debt consolidation is not the answer. It can allow you to consolidate multiple debts with higher-interest rates into one manageable loan with a lower rate of interest and a single monthly payment. However, you’ll still owe the same amount of money.
While they’re both designed to help make debt more manageable, debt consolidation and debt settlement are very different. Debt settlement often involves hiring a third party to negotiate with lenders on your behalf to reduce or eliminate your debt. There are some serious implications of going the debt settlement route, including costly fees and a significant hit to your credit rating. With debt consolidation, you’re simply borrowing a lump sum of money which you’ll use to pay off your outstanding credit card and other revolving debt.
While applying for a new loan can cause your credit score to fall a few points, over the long term consolidating your debt could actually help you raise your score. Specifically, it could help you lower your credit utilization, which is the amount of credit you’re using divided by the amount of credit you have available. The lower this number, the better. With a personal loan, which helps pay down principal, you’ll reduce the amount you owe and lower your credit utilization, which will raise your credit score.
Another thing to note about credit is that the better your credit score, the better rate you’ll receive on a debt consolidation loan. So, if you have a credit score that’s fair or even poor, you may want to get a cosigner with good credit.
While lowering the amount of interest you pay is the point of debt consolidation, whether or not you actually pay less depends on the interest rate and term of your personal loan.
Say, for example, you get a personal loan with a lower rate than you’re currently paying on your credit cards. If you choose a longer term on that loan, you’ll lower your monthly payments — but you could end up paying more money in interest over the life of your loan.
Though the process varies by lender, applying for a personal loan can be quick and easy. Many lenders offer the convenience of applying online, as well as quick decisions and access to funds in days. As part of the application process, you’ll need to provide verification of your income and identity. Once your loan approval is complete, many lenders will even manage the debt payment process for you.
Debt consolidation with a personal loan could provide an excellent opportunity to save money, pay off debt sooner, and improve your credit score. A Citizens Bank loan officer is ready help you determine how much you could potentially save. Learn more about our personal loans or call 1-888-333-0104.
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