What Is Credit Consolidation?
Credit consolidation is a form of financial help. It is the action of taking a large loan to pay back whatever outstanding credit you still owe. It is meant to roll multiple debts into a simpler single-payment plan, which is one way of keeping your credit debt in check.
Paying back all your smaller debts through one loan allows you to move past looking at your dues as manifold. Instead of focusing on many payments, you only need to worry about paying back the principal loan in installments. These installments are usually paid on a month-to-month basis.
Personal Loans Are The Usual Option
A personal loan, which is usually paid back in-between 1 to 7 years, is an ideal option because the fixed time period allows people to pay back the loan in specific installments. It basically makes your payments more manageable. Additionally, credit consolidation may be cheaper than separately paying back all your smaller debts, since those are likely to have high interest rates attached to them.
However, you will need a good credit score to pull down the interest demanded on a personal loan. A bad credit score can lead to interest rates that are just as high as any of your smaller dues.
The interest rates on personal loans range from 5% to 36%. Even with an excellent credit score, the interest rate will still be around 10% usually.
Credit Cards Are Another Option For Consolidating Debt
Getting a credit card with a 0% annual percentage rate. These rates usually come with promotional cards. These types of cards allow anywhere from a few months to up to two years to repay the balance without incurring interest fees on top of the principal.
Here Are Other Possible Routes For Consolidating Debt
There are a couple of options outside of the traditional loan and promotional credit card options that many debt holders are interested in exploring further.
Banks Can Offer Specific Loan Packages For Credit Consolidation
Banks are aware of credit and debt consolidation services, and provide those to customers interested in taking out a loan or promotional credit card for that purpose.
There are specific plans that allow you to get a fixed-rate debt consolidation loan, which you can then pay back to the bank in installments over a set number of terms.
Getting a loan from the bank may be a harder option to pursue than paying off the credit debt on a new card or putting your home up as collateral. The benefit is that a loan is a secured debt, since it is guaranteed to be there based on the borrower’s funds or assets. Credit cards and other forms of financial assistance may not hold this guarantee of available funds.
The downside in finding a secured debt like a bank loan is that there are strict requirements on receiving it such as a particularly high credit score range.
When Is Credit Consolidation A Good Idea?
Credit consolidation is an appropriate action to take if you are not struggling to meet your debt obligations, but are looking to get a better handle on them. It also focuses on saving you money in the long run by cutting down on interest payments.
If your interest rates on credit loans and other debts are high and varied then consolidating your credit debt is a good path to take. While consolidating debt is a relieving strategy, it may not solve the original problem of how you fell into debt. If your spending habits are under control then consolidation becomes a viable option. However, it is important to note that for consolidation practices to work you should not fall back into debt.
Consolidating Your Credit Card Debts
For example, say you have credit card payments each month on multiple cards but are still able to meet your payments. If you want to handle these payments at once and lower your interest costs then a loan with a lower interest rate has a lot of appeal. You can save money on interest and pay back your debt faster.
This process is a way for debt holders to buy time. It is important to consider whether you are willing to pay less now but for longer duration of time. If you are not disciplined in handling your finances then this practice is not going to work. According to reporting by CNBC, there are many debt consolidators who run up new debt on a credit card a year after receiving a loan.
Choosing An Option That Works For You
There are some key points to be aware about when it comes to successful credit consolidation.
Focusing On Paying Back High Interest Dues
Most people focus on paying back debts that have high interest rates attached to them, such as credit card debt. These dues are the payments that are really going to cut into your wallet in the long run. They are also the dues that credit consultation advisers will either advise you to pay first or will pay off for you first.