Debt Consolidation can help your debt problems
Your financial situation is different from someone else. The debt relief service that works for someone may not be the best choice for someone else. You should take the time to understand all the debt relief options available to you to find the best solution for your needs and goals.
What Is Debt Consolidation?
Consumer Debt Consolidation (often referred to as debt management) is a process of combining your unsecured debts into a single, larger debt (loan) with a more favorable interest rate, payment terms and lower monthly payment. Examples of unsecured debts that can be consolidated include credit cards, personal loans, medical bills and some types of student loans. The goal of debt consolidation is to improve your financial situation by lowering your TOTAL costs of financing your debts.
Consumer debt consolidation simplifies loan repayment, offers a means of reducing your average interest on your unsecured debt, usually lowers your total debt costs and helps you get out of debt faster. There are many factors that come into play to get you the best possible average interest rate. These factors include the type of debt, your income, credit score, payment discipline, and other factors.
Types Of Debt Consolidation
How Does Debt Consolidation Work?
Consumer debt consolidation is simple in principle. You borrow money and pay off your unsecured debt balances and remain with one, often larger debt, to pay off. Ideally, this single payment will have a lower interest rate than your unsecured debts, so you’d pay less in interest while paying down the debt. The main goal is to reduce or eliminate the interest rate applied to the balance. This makes it faster and easier to pay off credit card debt.
In many cases, you can get out of debt faster, even though you pay less each month. Debt consolidation essentially gives you a more efficient way to eliminate debt.
Debt Consolidation Options
Debt Consolidation Considerations
Is It Right For You?
Debt consolidation is not the same as debt reduction. The amount of unsecured debt being financed remains the same. It simply moves from several small to one large personal loan. It is a matter of how expensive (interest charges) it will be for you to pay off the debt. The debt still needs to be paid off. It didn’t just disappear.
Debt Consolidation will not eliminate your unsecured debts but will help you get them under control. It can be a successful debt relief option when:
- Your unsecured credit card debts are at least $10,000 or greater.
- You can consistently support the debt consolidation loan without resorting to new credit card purchases for your other monthly expenses.
- The debt consolidation loan APR should be significantly less than your credit card accounts.
- You have the discipline to not use credit cards until the debt consolidation loan is paid off.
Does It Affect My Credit?
Debt consolidation, when used properly, should improve your credit profile with time.
With the debt consolidation loan funds you will be paying off multiple unsecured debt accounts. This is positive for your credit profile.
The multiple unsecured debt accounts should be kept active rather than canceling them. Each of these unsecured debt accounts has an unused credit limit. The sum of these unused credit limits increases your total amount of available credit. This lowers your Credit Utilization ratio, where less than 30% is positive for your credit profile. You improve your “credit worthiness” as a consumer.
You need to be consistent in your payments of the debt consolidation loan, otherwise this will be negative for your credit profile.
As your unsecured debt account balances are paid off you should do a thorough review of your credit report to ensure that the accounts are probably updated. Delays and mistakes can happen
And finally you need to avoid the biggest mistake people make after consolidating unsecured debt like credit cards. That is, not stopping making new credit card charges.
Debt consolidation is to allow you to focus on eliminating, not adding to your unsecured debt.
Consumer debt consolidation can often help borrowers get out of debt faster than they otherwise would when dealing with multiple outstanding credit cards, loans, and other debts. Most borrowers obtain debt consolidation loans with much lower interest rates than those attached to their current outstanding debts. This helps lower the interest expenses they’re incurring each month, and it can help accelerate the payoff of outstanding debts.