There are over 537 million open credit card accounts in the United States with the average American having three credit cards.1 Credit Karma reported that their members had an average debt of $6,198 per member.2 That debt is only increasing as credit card interest rates have inched upwards during 2022. The average credit card rate at the beginning of 2022 was 16.13 percent.3 By August 3, 2022, CreditCards.com reported that the national average credit card APR soared to an all-time high, exceeding 17.90 percent for the first time since the organization began tracking average interest rates in 2007.4
Crippling debt requires action for debt relief which may include personal bankruptcy as an option.
Credit card interest rates aren’t the only loan interest rates that are adjusting upward due to Federal Reserve rate hikes. Mortgages, home equity loans, car loans and personal loans are also being affected. One way to try to manage rising debt without filing for bankruptcy is a debt consolidation loan.
What is it?
A debt consolidation loan is a single loan that you take out to pay off multiple other debts like credit card bills, personal loans, medical bills, student loans, etc. A debt consolidation loan generally has a lower interest rate or lower monthly payments, or both.5 A debt consolidation loan is a personal loan and it has both positive and negative benefits.
Do you really save?
When you consolidate your debt you will make your payment to only one source which will be due generally once per month. That makes managing your finances easier and it makes it harder to miss a payment date. Your debt consolidation loan may be at a lower interest rate than you were paying on your previous debt, so any money you save when you consolidate can be put toward paying off the debt consolidation loan quicker.
However, if the loan term is longer than on your previous debts you will pay more money in interest in the long run, which will cost you more. There may also be fees involved with a debt consolidation loan. These fees can include origination fees, balance transfer fees, closing costs and annual fees.6
When you apply for a debt consolidation loan the lender will check your credit worthiness and in doing so your credit score will temporarily be lower because of this credit check. Your credit score can also go lower once you receive a debt consolidation loan because you will lower your average account age which the credit scoring companies use as a factor in credit scoring. There are several positive ways that debt consolidation can affect your credit score including the fact that it makes the types of credit you have more diverse, which lenders favor.
A debt consolidation loan can increase your available credit and lower your credit utilization ratio, which is the amount of revolving credit you are using divided by the amount of revolving credit available to you. One of the most important factors in determining your credit score is an on-time payment history, so if you pay the debt consolidation loan on time it can improve your credit score.
Bankruptcy Options
If you are facing a wage garnishment, where the court will order your employer to deduct a certain amount from your pay and send it directly to your creditor, consolidating your debt can allow you to pay back your creditor before the wage garnishment order, protecting your credit score and giving you time to deal with your financial situation.
It can be difficult to figure out whether a debt consolidation loan will help save you money. Most people have multiple debts with different interest rates. Taking out a debt consolidation loan that costs you more money or one that has a monthly payment that you can’t afford will only make your financial problems worse. That is why it is best to seek professional help from a bankruptcy attorney when you are facing a financial crisis.
A bankruptcy lawyer at Hines Law in Massachusetts can help you determine if filing for personal bankruptcy is your best option. There are many benefits to bankruptcy however, you must be eligible and meet certain criteria.
Our bankruptcy firm specializes in Chapter 7 and Chapter 13 and can help with wage garnishment, foreclosure and aggressive creditors. If you have questions or need help handling your debt, call and speak to a bankruptcy attorney today, Free.
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1 Credit Card Statistics in the United States 2022 by Steven Dashiell and Megan Horner, 5/23/2022
Link: https://www.finder.com/credit-card-statistics
2 Average Credit Card Debt in America in 2022: A Credit Karma Study by Rebecca Moran, 6/21/2022
Link: https://www.creditkarma.com/insights/i/average-credit-card-debt
3 Credit Care Interest Rates Will Jump as Feds Try to Cool Demand, Drive Down Inflation by Susan Tompor, 1/26/2022
Link: https://www.freep.com/story/money/personal-finance/susan-tompor/2022/01/26/credit-card-rates-inflation-federal-reserve/9210165002/
4 Average Credit Card Interest Rates: Week of August 3, 2022 by Kelly Dilworth
Link: https://www.creditcards.com/news/rate-report/
5 What is Debt Consolidation? by Julia Kagan, 3/15/2022
Link: https://www.investopedia.com/terms/d/debtconsolidation.asp
6 Pros and Cons of Debt Consolidation, by Kiah Treece and Jordan Tarver, 4/20/2021
Link: https://www.forbes.com/advisor/personal-loans/pros-and-cons-of-debt-consolidation/