When you consolidate debt, you open a new line of credit or take out a loan to pay off existing debts. National credit bureau Experian® offers this example of how it can work:
Say you have a total credit card debt of $10,000, an average interest rate of 22% and minimum payments that total $400 each month. If you pay only the minimum, it would take you 184 months to pay off your debt. This means you’d end up paying $8,275.44 in interest on that debt.
Now say you pay off that debt with a $10,000 consolidation loan. It has an interest rate of 11% and a fixed monthly payment of $217. That means you can pay off the new loan in 60 months and save more than $5,200 in interest.
If the consolidated loan has a lower annual percentage rate (APR) than your other loans, you might save money. However, be aware of low APR “teaser” rates that revert to a higher APR after an introductory period—which could cost you more in the long run.
How Are Debt Consolidation Interest Rates Determined?
The better your credit scores are, the lower your debt consolidation interest rate might be.
You can check your credit for free with CreditWise from Capital One, which gives you your VantageScore® 3.0 credit score and TransUnion® credit report. If you don’t have excellent credit, CreditWise might be able to help. It gives you tips for improving your scores. It won’t hurt your scores. And you don’t even have to be a Capital One customer to sign up.
You can also learn more about getting free credit reports once a year from each of the three major credit bureaus by visiting AnnualCreditReport.com.