Have ever been in a situation where you are struggling or overwhelmed to manage different monthly debt payments? Or you have extremely high-interest rates, which are costing you lots of money? Now, if this is your situation, debt consolidation might be the best solution.
An article by CNBC revealed that close to 38% of Americans with credit card debt have resulted in debt consolidation. While this might be the solution to your debt problem, it’s essential to understand the ins and outs of debt consolidation. Ensure that if you choose debt consolidation, it’s for your good.
Besides, it’s essential to remember that debt consolidation isn’t the answer to your poor financial decisions. Therefore, you will need to address important issues like financial discipline, money mindset, budgeting, overspending, as well as having a workable debt repayment strategy. Please note that these are important to your financial wellbeing, regardless of whether or not you choose debt consolidation.
So, what is debt consolidation?
This is the process of combining all your debt payments into one payment, to make it easier and simpler to pay. Most people use debt consolidation to combine student loan debt, credit card debt, as well as other forms of unsecured debt like payday loans consolidation and medical debt.
How does debt consolidation work?
The idea behind debt consolidation is to allow you to combine all your debt obligations, and put them together into a single, large package. For this to be possible, you will need to leverage the debt consolidation option with the best possible terms to clear your consolidated debt.
Therefore, rather than having many payments to make every month, you will only make a single payment every month after you consolidate your debt. Besides, there are chances that your payment will be at a reduced interest rate.
However, most people wonder whether debt consolidation is bad. Well, consolidating your debt is not bad. However, it can become a serious problem if you cannot pay off your debt before you start dealing with the issue of high costs again.
With that said, although debt consolidation can be a good thing, you need to be extra cautious because it can land you into a bigger financial problem in the future. Therefore, make sure that you clearly understand the repayment terms and conditions before you consolidate your debt. Besides, ensure that you understand the long-term effects of debt consolidation on your finances.
Can debt consolidation affect your credit score?
Debt consolidation can lower your credit score in the short term. This happens because you will have a new line of credit, where you will transfer a huge balance into it. Now, depending on the time it takes for your lenders to update credit bureaus, there’s a chance that your credit report will reflect both your new consolidated debt and your several debt accounts at once.
The balances can continue showing until your creditors report that your debt consolidation account has cleared all the other debt account balances. Besides, your request to have a new line of credit, one that allows you to consolidate your debt can lead to a temporary decline in your credit score.
Is debt settlement the same as debt consolidation?
Debt settlement and debt consolidation aren’t the same things. Debt settlement allows you to negotiate with your payday loan consolidators in order to pay a lesser amount than what you owe. With debt settlement, you will be needed to pay a lump-sum amount.
Generally, there’s no legal mandate for lenders to start debt settlement negotiations. However, they can enter into negotiations if they can recover a certain percentage of their money. Please note that debt settlement can affect your credit score too.
Your creditor can opt to close your account, thus leaving you to deal with the effects of your credit score. If the lender reports, “account settles for less than the agreed amount” this report will stay in your credit report for seven years.
So, when should you opt for debt consolidation?
If you are still wondering whether debt consolidation is a good idea, here are a few things to consider:
- Do you have a plan in place to guide you towards becoming debt-free?
- If your debt is over $10,00
- You are no longer committed to spending on credit
- Plan to reduce your interest rates and monthly payments
- Combine all your debts into a single, lump-sum debt
- Consult professional agencies to help you with your debt situation. You can get more information from federatedfinancial.com/videos
- Do your math to know how debt consolidation will save you money—don’t forget to factor in the associated fees