Don't fall for these 3 debt consolidation myths

If your personal finance goals include paying off outstanding debt, consolidation is one solution to consider. A debt consolidation loan allows you to combine credit card debt and other types of debt into a single personal loan.

While you could open a 0% APR balance transfer credit card to manage debt, consolidating with personal loans can yield some advantages. For example, you can exchange a variable interest rate on credit card debt for a fixed interest rate. Reducing your interest rate can save you money over time. And when more of your monthly payment goes toward the principal, it's possible to pay down debt faster.

But there are some debt consolidation myths that may be holding you back from getting a personal loan.

3 myths about debt consolidation

Here are some of the biggest misconceptions about consolidating debt, along with some tips on how to choose a debt consolidation loan.

1. It damages your credit score
2. Debt consolidation will decrease debt and save money
3. It's time-consuming to consolidate debt

1. It damages your credit score

Maintaining a good FICO score is important when borrowing money. The better your credit history, the easier it is to qualify for loans.

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A common myth about debt consolidation is that it will hurt your credit score. It's a fact that applying for a personal loan may require a hard inquiry of your credit report, which can trim a few points off your credit score. But over time, consolidating debt could help improve your score.

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2. Debt consolidation will decrease debt and save money

One of the most persistent debt consolidation myths is that it will automatically decrease your debt and save you money.

Consolidating debts — whether it's student loan debt, credit cards or other debts — doesn't by itself reduce what you owe. Instead, a debt consolidation loan provides you with the funds to pay those individual debts off. Going forward, you'd make payments toward your consolidation loan.

Debt consolidation shouldn't be confused with debt settlement, which allows you to pay off outstanding debt for less than what's owed. This option is typically only available if you're significantly behind on payments to a debt, which can cause serious credit score damage.

Depending on the personal loan term, amount and interest rate, it's possible that debt consolidation may not save you as much money as you expected. Visiting Credible can help you compare debt consolidation options to find the best personal loan rates for you, based on your credit score and credit history.

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3. It's time-consuming to consolidate debt

Another misconception about using a personal loan to consolidate and pay down debt is that it's a lengthy process. In reality, it's possible to apply for personal loans for debt consolidation online and be approved very quickly.

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Consider all the options for managing debt

Debt consolidation is something to consider if you have credit cards or federal student loans and you'd like to streamline your monthly payments. If you have other financial obligations, such as mortgage debt or private student loans, you could try consolidation or explore ways to refinance debt instead.

Deciding to refinance mortgage debt, for instance, could make sense if you'd like to switch from an adjustable-rate to a fixed-rate loan. And you might refinance student loans to remove a cosigner or take advantage of low interest rates. You could even choose to refinance personal loans if you have any outstanding.

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