When you have multiple debts, which is quite natural and not a crime is given the fact that you have multiple credit cards in your wallet, dealing with them may make you feel like playing whack-a-mole. There are so many things to keep in mind and track of such as:
- The different bills
- The different amounts
- The different due dates
- The different rates of interest
- The different minimum balances and
- The different possibilities of accruing late fines and penalties.
It is highly likely that you will see one more bill pop up when you just sent in one payment thereby keeping you engaged for 35(!) days of the month in managing your debt and finance, which you naturally start to feel like a futile effort.
It is often seen that people get behind easily when repaying their multiple debts overwhelms them. In such a situation debt consolidation seems to be the perfect aide. It will help you in several ways such as:
- The amount will be large enough to make all the payments
- You can essentially roll all your debt payments into one having only one bill to focus on and thereby eliminating the chances of any bill payments missed out and
- The loan amount will carry lower rate of interest and longer terms to reduce your monthly payments and making things comfortable thereby.
That means debt consolidation will reduce the number of debts only making it more convenient for you to pay back and certainly not lower your debt amount. In turn, it means it will not affect your credit score in a negative manner.
However, the amount you will receive and the rate at which this amount will be lent will entirely depend on your current credit score. It is for this reason you are requested to make sure that you know about your credit score and find about the debt consolidation ratings before you apply for such a loan.
Need to be careful
So far so good! However, if you rush to the bank now to get such a loan thinking that all your debt worries will be over soon tarry a little as there are a few surprises down the road. Know about these to be well informed and educated before you take the final decision with full confidence.
No matter how impressive it may sound looking simply at the bevy of benefits provided by debt consolidation, there are a few pitfalls that you should be careful of. However, you will have nothing to fret if you know and understand the basics of debt consolidation.
There are mainly two ways in which you can roll all your debt payments into one bill:
- By transferring the debts to a 0% balance transfer credit card or
- By taking out a debt consolidation loan.
The one you may choose will, however, depend on your credit score which is a big determining factor.
- It is best to choose a balance transfer if you have a credit score of 700 or higher.
- On the other hand, if your credit score well below 700 as it is very common to have if you have multiple debts, a debt consolidation loan is the right approach to manage your finance and debts.
In most of the cases, people typically choose to take out a debt consolidation loan to simplify their stressful situation and manage their finances. It is ideally the best way to save money on interests.
However, as a borrower you must be aware of a few things and act accordingly. These are:
- The upfront fees
- The temporary terms
- The fine print of the loan contract and
- The plan to address your behavior that put you in such a situation in the first place.
If you are not careful about these factors then such an approach will not only eat up your savings but will also actually exacerbate your debts, especially when the new lines of credit tempts you to make impulsive spending again.
How it works
The working process of debt consolidation seems to be simple. When you take out such a loan you are:
- Given a lump sum to pay off all your existing debts and
- You will now have only one creditor to pay.
If you have a higher credit score, debt consolidation will work better for you because your high credit score will allow you to qualify for a loan with lower interest rates than what you are paying currently. However, debt consolidation can be the best option for people with bad or poor credit as well.
According to the law, you can take out a debt consolidation loan to simplify your finance and manage almost any type of unsecured consumer debt such as:
- Credit cards
- Payday loans
- Student loans
- Medical bills
- Utility bills
- Taxes and
- All bills that have gone to collection.
That means debt consolidation is not limited to credit card debts only which is a huge encouragement if you want to manage your finance effectively and successfully.
Loans to choose
According to the survey reports of the LendingTree, a personal loan seems to be the most popular option for debt consolidation. However, a home equity loan or HELOC may work equally well.
There are several companies that specialize in such types of consolidation loans. You may choose one after thorough research or prefer to work with your known local bank or credit union.
However, when you choose a type of loan make sure that you keep in mind a few factors such as:
- Your credit score
- Your unique needs and
- The specific situation.
Since there are different loan products you may find overwhelming at times which is when you will need the help of a professional and expert debt counselor. It is also important that you compare all offers available since obtaining a lower interest rate and better loan terms are the primary concerns.
Lastly and most importantly, as lenders will do a credit check, make sure your shopping is complete within 45 days because several hard credits pull beyond that time window may damage your FICO credit score.