When multiple creditors call you expecting payments, you may be overwhelmed financially and not know where to turn. One option to consider is debt consolidation. Debt consolidation involves borrowing money from one source to pay off all of your debts. While common, debt consolidation is not for everyone.
Debt Consolidation Process
With debt consolidation, the goal is to get all of your debts into one single package. This way, you can make one payment every month instead of multiple debt payments throughout the course of the month. You could do this by taking out a loan and using the money from that loan to pay off all of your other accounts. You could also use a credit card to pay off multiple accounts, which would put the entire balance on one card.
Saving on Interest
Consider consolidation if you are paying very high interest rates on most of your accounts. If you have several credit cards with balances, you may be paying very high interest rates. If you borrow money through a home equity loan or some other type of personal loan, you can usually get a much lower interest rate. This could save you thousands of dollars over the course of paying off the debt.
Reducing Your Accounts
Another reason to consider consolidating your debt is to reduce your number of accounts. When you only have to worry about making a single payment every month, it is much easier compared to making multiple payments. If you do not keep up with all of your payments, it can lead to late charges and credit score damage.
When to Avoid
Even though debt consolidation can help eliminate interest and accounts, it is not always the best approach. When you pay off your credit accounts, this opens the balances back up for use. If you are not disciplined enough, you may accumulate even more debt. If you do not have good credit, debt consolidation may not even be an option, because you cannot take out any additional loans to pay off your debt.
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