For people who have poor credit scores due to a high level of debts, debt consolidation may be an effective means of helping to pay off debt and eventually build a better credit score. However, debt consolidation is not a magic pill that immediately cures poor credit scores and it does not work unless you employ other methods as well.
Basics
Debt consolidation can help you with your debt burden by lowering your recurring payments and combining several payments into a single payment. What debt consolidation firms do is issue a loan to you for the sum of what you owe in credit card debts and loans. The loan is used to pay off these debts. You then make regular payments to the debt consolidation firm for the debt consolidation loan.
Benefits
If the debt consolidation loan lowers the total payments you must make on your debts, it may help your credit score to recover by bringing your monthly expenditures within an affordable realm. In this way, you will have less tendency to harm your credit score by missing payments. It also simplifies the debt-payment process: instead of having to pay multiple debts due on different days of the month, you only have to take care of one payment per month. This can relieve headaches and keep you from missing payments due to forgetfulness.
Detriments
Debt consolidation firms are businesses that expect to make a profit. When they give you money to pay off your debts, they do so with the understanding that they will make a profit through interest payments. Even if your monthly payments are lower under the debt consolidation loan, the number of payments you must make is usually more, which means that you will end up paying a lot more in interest, even if the interest rate may be lower.
Making it Work
One of the main problems that people have after getting debt consolidation loans, according to Dave Ramsey, is that it just gives debtors room for more debt. By lowering the monthly payments on their existing debt, consumers often see this as an opportunity to accrue even more debt, especially through credit cards. Thus, lowering your payments through debt consolidation can only help if you change your spending practices as well. Keep a tight budget and do not accrue any more unnecessary debts. If you have some money left at the end of the month, save it. These savings can work like insurance against catastrophic events or help you to save on interest payments by paying off your debt consolidation loan early. Only in this way can debt consolidation help you to repair your credit score and help you to climb out of the debt hole.
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