Debt consolidation is an effective way to reduce your payments and pay down your balances faster, and once you've paid off the consolidation loan and eliminated your balances, you can use extra income to increase your personal savings. But while consolidation helps simplify debts, this method isn't right for everyone. Weigh the factors and decide if consolidation is right for you.
Definition of Consolidation
Debt consolidation is the process of taking out a new loan and using the cash from this loan to pay off your present balances. Debts included in a consolidation can include credit card bills, medical bills, auto loans, student loans and other installment payments. Consolidation benefits consumers who dislike juggling multiple accounts each month. Combining debts into one simplifies personal finances and creates one bill and one payment.
Interest Rate
Before making the decision to consolidate your debts, consider your present interest rate on credit cards and other loans. To benefit the most from a consolidation, it's imperative to receive an interest rate on the loan that's cheaper than your current rate. The interest rate impacts the monthly payment, and acquiring a better rate can save you money on debt payments each month. Get a debt consolidation quote from at least two banks. Compare rates in relation to what you're currently paying and assess the savings. Pick the loan with the lowest rate and best terms.
Credit Scores and Consolidation
Qualifying for a loan to consolidate your debts will require a good credit history. In other words, a good candidate for a debt consolidation loan is someone who pays his bills on time. Several late or skipped payments and other credit issues such as collection accounts can harm your chances of qualifying for financing. Check your credit report and score before applying for a loan. The higher your score, the better your odds of getting a loan. Dispute any inaccuracies on your credit report and have these errors updated before applying for a loan. Get your credit report from Annual Credit Report and order your personal score from Myfico.com.
Self-Control and Consolidation
If using a consolidation loan to pay off credit card balances, only apply for a loan if you don't plan on using the cards in the future. Too often, consumers pay off credit cards with a loan consolidation, and then reaccumulate balances on these credit cards. It can take a few years to pay off a debt consolidation loan, and if you acquire new debt on credit cards, you could essentially double your debt and complicate your finances. After paying off cards, store the cards in a place that's not easily accessible or destroy the cards with scissors or a shredder.
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