Should You Undergo Debt Consolidation While on Social Security?
Written by
Brooke Barley
Edited by
Amber Barkley
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Living off Social Security can be financially challenging. It can be easy to accrue debt when relying on a fixed income for all expenses. Unfortunately, racking up debt and defaulting on it while on Social Security can cause the benefits to be garnished.
One option that might seem appealing to pay off debt is consolidation. Financial experts weighed in on the pros and cons of retirees consolidating debt.
Pros
For some retirees, debt consolidation might be the right move. Here’s why.
Potentially Lower Interest Rate
“The biggest advantage is refinancing at a lower rate, which can significantly reduce your monthly debt payments,” said Joseph Camberato, the CEO at National Business Capital.
Usually, when a person chooses to consolidate debt, they’ll end up paying a lower interest rate than they were before, so this can make the debt easier to tackle.
Simplifying Payments
Once someone chooses to consolidate debt, they create this streamlined way to make payments, which can really help organize finances.
“The foremost benefit of debt consolidation is simplifying your monthly payments into a single cash outflow, which can make payments more manageable,” said certified financial planner Charles Pastor.
Introductory Opportunities
When one signs up for debt consolidation, Pastor said there might be beneficial opportunities to take advantage of that can help lessen the debt load.
“Debt consolidators can benefit from certain balance transfer opportunities, which provide a zero-interest introductory period,” he explained. “This time can be used by borrowers to pay down their balance without accruing additional interest.”
Better Credit Rating
Consolidating your debt can improve your credit score. As you pay it down, your credit utilization ratio, or the amount of credit available to you that you’re currently using, decreases — as long as you don’t add more debt. This is one of the factors considered in your credit score. Making on-time payments will also improve your credit score.
Though consolidating will decrease your credit mix — how many types of credit you’re using — which can lower your score, the dip should be temporary and offset by the improvements.
Cons
It’s important to understand the drawbacks of debt consolidation, as well.
Debt Can Take Longer To Pay Off
Camberato said although the monthly debt payment might decrease, this might mean you’ll be paying it for longer.
“The downside is that refinancing often means extending your repayment term,” he explained. “While your monthly payment might go down, stretching out the term could lead to paying much more in interest over time.”
Specific Credit Score Needed
Pastor noted that some retirees might not have the credit score required to qualify for debt consolidation. Even applying can have negative consequences for one’s credit score.
“A denied credit card or loan application can in turn hurt their credit. A retiree who paid off their mortgage decades ago may not have a strong enough credit score to take advantage of the best credit cards or loans for debt consolidation,” he said.
Interest Can Build
Pastor recommended reading all the fine print when consolidating debt to make sure it doesn’t come back to cost you later. “The devil is in the details, and certain products can charge retroactive and/or high interest rates if a balance remains at the end of the introductory period.”
You Can Take on Additional Risk
“Consolidation will often require securing the loan with assets like a home, which introduces an additional risk if payments aren’t manageable,” said Kevin Guarino, partner and wealth manager at Clover Leaf Financial.
It’s important to know there is a plan in place to pay off the debt before consolidation, or there is the potential to lose additional assets.
“Without adjusting spending habits, it could create a less manageable problem down the road,” Guarino added. “A planned approach, considering factors like cash flow, existing assets and long-term goals, is essential.”
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