There is never a good time to have a lot of personal Debt, but now would be one of the worst times.

Americans are increasingly relying on Credit cards for everyday purchases and paying bills. Credit card balances jumped 13% last quarter from the same quarter in 2021, the biggest jump in more than 20 years, according to data from the New York Federal Reserve.

Since March, the Federal Reserve raised interest rates by a cumulative 225 basis points, or 2.25%. This helped push average credit card interest rates to nearly 18%, a record high since CreditCards.com started tracking it in 2007. A similar trend is happening with personal loans, mortgages and other forms of credit.

High interest rates make credit card and Debt Consolidation programs attractive avenues for consumers, said Bruce McClarySenior Vice President Membership and Communications National Credit Counseling Foundation.

These programs often advertise lower interest rates for combining all your debts and paying them off in one loan, but there’s more under the surface.

What are the disadvantages of consolidation?

Many lenders can offer borrowers lower interest rates on debt consolidation loans because they have longer terms. This could end up costing you more than if you didn’t go the debt consolidation route.

Debt consolidation companies may also charge additional fees such as a one-time loan origination fee and require you to pay a higher interest rate if you do not opt ​​for automatic payment.

“This additional cost over time on interest and fees could reduce your ability to build your safety net or save for a secure retirement,” McClary said. “So you don’t want to sacrifice your future for the present.”

Above all, debt consolidation is not “a silver bullet”, said Ismat Mangla, executive director of MagnifyMoney, a site that provides personal finance advice. The site belongs to LendingTree, an online lending marketplace.

While debt consolidation may ease some of your headaches now, if you don’t change any of the financial habits that got you into debt in the first place, you’ll just dig yourself a deeper hole, Mangla said.

She recommends contacting a nonprofit credit counseling agency like NFCC to discuss whether to consolidate your debt. They can also help you set up a debt management plan where you make a monthly lump sum payment to the nonprofit that makes payments to your creditors for you. In some cases, they are also able to negotiate lower fees and interest rates.

You can also contact your creditors and ask for a lower interest rate or terms that will make it easier to pay off the debt.

The savings you make can save you from having to take out a debt consolidation loan.

Does debt consolidation hurt your credit rating?

Debt consolidation does not inherently harm your credit score.

But if you apply for a debt consolidation loan (or any other type of loan), the lender must perform a “hard” credit check, which is recorded on your credit file. If you have a good credit rating, the inquiry should have a negligible impact on your rating. But if you have a bad credit score or have recently had several serious credit applications, your credit score could temporarily drop by up to 10 points.

It is important to research the rates before submitting an application. McClary recommends comparing rates and terms on sites such as NerdWallet Where The bank rate.

If you don’t make your minimum payment on time, your credit score will drop.

Is this a good idea? Who is eligible?

The answer largely depends on an individual’s credit score.

McClary said debt consolidation ads will often say, “‘you can get an interest rate as low as x’, but that interest rate may only be available to people with the best credit scores. “.

Typically, you’ll need a FICO credit score that’s in the mid-600s, according to The bank rate. In addition to credit scores, lenders also consider your income and other financial criteria.

Some lenders don’t specify a minimum credit score, but if you have a credit score below 600, you’re less likely to be approved. Or if you are approved, the interest rate the lender offers you will be higher than the advertised rate and they may not offer as large a loan as you need.

On the other hand, if your FICO credit score is 670 or higher, consider applying for a signature loan — an unsecured personal loan that likely has a better interest rate, McClary said.

What does debt consolidation mean?

Debt consolidation consists of taking out a new loan to repay several types of debt. It could also be used to pay off debt you have with multiple credit cards, also known as credit consolidation.

If approved, the lender will deposit the money directly into your bank account hoping that you will use it to pay off the debts you are consolidating or the lender will pay the balances for you.

Above all, it does not mean that you are debt free. You will be responsible for making a one-time, usually fixed, monthly payment to the lender.