Why Does the Debt Consolidation Program Work?

Debt consolidation is the act of combining all of your credit accounts under a single loan payment, according to Lending Tree. The point of a debt consolidation plan is to reduce your debt and lower your monthly obligation to free up more cash. To understand why debt consolidation works, you need to understand what it does for a consumer.

Interest

A debt consolidation program is created by a low-interest loan that is used to replace high-interest credit card debt. Your various credit card accounts are charging you interest in different payment cycles and at different rates, according to Jenny McCune on Bankrate.com. The lower interest rate of the loan will reduce how much interest debt you take on, and the fact that your debt is all on a single cycle will also save you interest. By lowering your interest obligation, debt consolidation accomplishes part of its goal of reducing your overall debt.

Service Charges

When you have multiple credit accounts, you also have multiple service charges and fees each month. If your payment is late on any of your accounts, you can then add a penalty fee to your debt as well. Consolidation works because it reduces all of your various service charges down to just one loan charge. It eliminates all of your other service charges and leaves you only responsible for the loan charge. It also helps you to reduce late fees by making you responsible for only one payment as opposed to getting hit for late fees on a variety of accounts.

Monthly Payment

One of the goals of a debt consolidation program is to reduce your monthly payments. There is a combination of factors that allow a debt consolidation plan to accomplish this goal. The lower interest rate reduces how much you pay per month as your monthly payments are based on your balance compounded by your interest rate. The reduction in the number of service charges also contributes to lowering your monthly payments.

Convenience

Trying to maintain a portfolio of multiple credit account payments can lead to problems. If you forget to make a payment because you lost your bill or you were unable to keep accurate track of your payments, then you will start to incur late charges and penalties. A debt consolidation plan reduces your stress and introduces convenience to your bill paying process by bringing your debt under a single payment.