Debt Consolidation 101: A Beginner’s Guide on Debt Consolidation

(MENAFN- Lauren Cordell)

Acquiring debt can happen at any time in a person’s life. Whether it’s to pay for your education, buying a new car, purchasing a brand new phone, or even mortgage, having debt can be quick as a flash. No wonder that almost half of the population incurs debt and is greatly troubled by such facts.

The simplest definition of debt, or credit, is money owed from someone else or an institution. Most people and even institutions use debt to purchase something that they could not afford in their current circumstances. This borrowing of money is under a particular agreement between the borrower and the lender, usually accompanied by the due date.

If you’re asking, what if you incurred many debts in different accounts or various purchases? How can you manage them all? The answer to your question is debt consolidation. Below are some of the essential information you need to know about debt consolidation and why you should know them sooner rather than later.

What is Debt Consolidation?

Debt consolidation or credit card consolidation means combining all your existing debt obligations into a new loan with favorable terms and a much lower interest rate structure. To simply put, debt consolidation is “unifying” all your multiple debts into one single payment by acquiring a new loan.

If you are having trouble managing your finances to pay all your debt, not to mention the various due dates and interest rates, you should consider debt consolidation. It can simplify all your payments and eliminate your worry of going from different payment centers to make your debt payments.

Utilizing debt consolidation not only gives you the comfort of paying multiple debt into one, but it can improve your credit score too! Also, many debt consolidation companies provide various offers that include lower interest rates. Visit Crediful now to know more about the best debt consolidation companies that fit your financial health.

How Does Debt Consolidation Work?

• Some advantages of debt consolidation are reducing your interest rate and simplifying payment, but before you consider debt consolidation loans, try to reflect if you need one. Don’t be rash in deciding these things because it might backfire in the long run. To better decide whether to use debt consolidation, consider the tips
• Figure out how much you owe. Doing so will help you determine how much you need to borrow should you consider consolidating with a loan.
• Calculate your weighted average interest rate by looking for an online calculator to show your average credit card interest rate. Remember that each credit card has varied interest rates and balances. That’s why you need to calculate your weighted average interest rate to have a unifying number.
• Weigh your consolidation options. Debt consolidation loan, debt management plan, debt settlement, home equity, and more are different options and methods with various pros and cons. Be sure to spend a little time researching these methods to have the better end of it.

What Are The Advantages of Debt Consolidation?

As stated above, debt consolidation can simplify your payment and can reduce your interest rates. Yet, there are other advantages of debt consolidation. One is you can pay off debt faster. Since you now have a lower interest rate, the payment you make goes to your actual debt instead of on the added interest charges. With this, you can pay off your debt more sooner.

Another advantage is that it can boost your credit score. A debt consolidation loan will give you payment schedules, which will improve your credit score because you will most likely have on-time payments. Also, it will improve your payment history and will give favorable impressions from creditors or lenders.

Moreover, debt consolidation can help you avoid credit damage because it will help you pay on time and prevent credit score damage and even bankruptcy.

What Are The Disadvantages of Debt Consolidation?

Debt consolidation does not only yield excellent and perfect; it also comes with its fair share of disadvantages. One disadvantage of debt consolidation is if you don’t stick to your payoff plan, you might risk damaging your credit and may face additional penalties. You need to stick to your payment plan and pay on time. Otherwise, you will see yourself back where you started.

You can also pay at a higher rate when consolidating your debt because all your debt is combined into one. This is both an advantage and a disadvantage depending on how you perceive it. Also, debt consolidation is not a guarantee that your financial problem will magically solve on its own. Make sure to set a realistic financial budget and religiously stick to it.

Are There Signs That You Should Try Debt Consolidation?

Trying out debt consolidation is not for everyone and certainly does not fit everyone. Here are some of the signs that you should consider before consolidating your debt:

• You are spending more than what you are getting.
• You have a debt on more than five credit cards.
• You have been consistently turned down for installment loans or credit card loans.
• You are at the limit of your credit card.

If you are in one of these situations, you better start reflecting on your future decisions and act now.

Takeaway

At some point in our lives, we will face hardships and downfalls. Whether it is acquiring unending debts or something else, staying ahead of it will make a difference. Start planning now and set a realistic goal that will help you stay on top of every downfall.

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