Trying to gain control over debt can feel like a losing battle. However, you might want to consider debt consolidation before you throw in the towel and decide to keep managing your debt the way you are already doing it.
Debt consolidation can relieve you of the overwhelming management of multiple debts that can be difficult to keep track of all of it. You can work with a financial advisor to determine how best to consolidate your debt, whether through transferring debts to one area or securing a more manageable loan to pay off your debts.
There are many reasons to choose debt consolidation to improve your finances, which will all come together to reduce the insurmountable stress that having debt causes.
What Exactly Is Debt Consolidation?
There are two main methods of debt consolidation.
- First, if you are trying to manage credit card debt from multiple credit cards, you could opt for a transfer balance card (this is the first type). This takes all the credit card debt you have and transfers it to one card that you will pay off with interest. As a result, you will typically get an interest rate lower than most traditional credit cards.
- Secondly, the debt consolidation process will review the debts you have and determine an amount that can be loaned to you based on your debt, income, and other information. This loan is then distributed to your debtors to pay them off. You will then make payments with interest towards this loan to pay it off in a certain amount of time.
- Finally, you can also manage your debt on your own by using a personal loan to pay off your debts (this is the second type). This will make things easier on you as you’ll have fewer debtors to pay, but you do not automatically have the aid of a financial advisor to ensure your debt consolidation is managed well. You must do all the work yourself.
Consolidates Multiple Interest Rates
For example, if you have credit card debt, you likely have some steep interest rates that you are up against when trying to pay off your card.
In addition, if you have multiple cards, you might not realize how much extra money you are paying to have a balance on your cards.
Doing a debt consolidation allows you to pay off those cards in full, so you are only working with one interest rate from your debt consolidation loan. In addition, these interest rates tend to be a lot lower than those interest rates on other types of debt.
Eliminates Making Multiple Payments
If your calendar is full of dates you need to keep track of to make your debt payments on time, you can reduce that need to track your bank account.
When you undergo debt consolidation via a bank loan, this loan will be transferred to your debtors to eliminate your balance with them.
You then arrange to send a monthly payment to your financial institution. Furthermore, you can have this come out of your bank account automatically, so all you have to do is ensure there is money in there.
You Avoid Late and Missed Payments
Since you will only have to worry about paying one debt source after debt consolidation, you will not run the risk of late and missed payments adding up. This is especially effective if you ensure you always have the money you need in one of your accounts and set up an automatic withdrawal with your financial institution.
Late and missed payments get reported on your credit score, making borrowing money in the future challenging.
Improves Your Credit Score
Missed debt payments can harm your credit score. Your credit score is essential to securing yourself a much simpler financial future. When you have some liability, it shows on your credit score.
If you eliminate those debts and continue to make your monthly payments on your debt consolidation, this will help improve your credit score.
Your score will reflect that you have eliminated debt and managed the loan well by making on-time payments.
Potentially Helps You Pay Debt Faster
Depending on the severity of your debt situation, having a debt consolidation loan with a lower interest rate could help you potentially pay off your debt faster.
As we know, interest rates can compound the debt we already have to the point where it can be impossible to get ahead. So, not working against all these rates could reduce the overall amount you have to pay.
One thing to consider is that you can even pay off your debt consolidation early or make more than one payment if you have some extra money. However, check the terms of your agreement first, as some consolidations might stipulate a fee for paying early.
For debt consolidation to work to your benefit, you need to practice discipline when avoiding future debt where possible. While most of us will always have some level of debt, irresponsible spending can lead to unnecessary debt. If you go and max out your credit cards again, you will not get the benefits that debt consolidation can have for you.
Image credit: [Peshkova]