Credit debt can sometimes get out of control and consumers are forced to consider their debt management options. One option is debt consolidation. Consumers who are not familiar with the process of consolidation may not consider taking advantage of it. Understanding the process of consolidating credit versus not consolidating credit will assist consumers in making that financial decision.
Taxes
You can help your tax situation when you consolidate debt, depending on how you get your debts under one payment. If you use a home equity line of credit or a refinanced mortgage to finance your debt consolidation, then your debt has moved into an account where the interest is tax deductible, according to Geoff Williams, writing on the Wallet Pop website. If you do not use home loans or lines of credit to consolidate your credit card debt, then you lose that deduction because credit card interest cannot be deducted from your taxes.
Service Charges
If you have six credit card accounts, you are paying six sets of service charges. You are also subject to six sets of penalties and fees if your payments are late. With debt consolidation, you reduce the amount of service charges you pay by reducing all of your active debt from one account down to just one. Even if your payment is late from time to time with your debt consolidation account, you are only subject to one set of penalties and fees.
Improving Your Credit
The amount of money you have charged against your credit limits is one of the factors that lenders use to determine whether you can afford a new loan, according to the Lending Tree website. When you consolidate your debt you are removing the balances from your credit accounts but keeping the credit accounts open. That means that you are increasing the amount of available credit you have available. That can increase your credit score and give you access to financing for a new home or new car.
Lowering Your Interest Debt
You consolidate debt with a loan or program that has a lower interest rate than your credit cards. If the average interest rate on your current credit cards is 18 percent, and your consolidation account is 10 percent, you reduce your interest debt. Also figure that multiple credit card balances compounding interest individually are going to cost significantly more than a single balance compounding at a lower interest rate.
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