The Impact on Your Financial Future
The Experian data in 2021 reports that the Average American has a debt balance of about $96,371, which is an increase from the average debt balance of $92,727 in 2020. One of the reasons why the debt profile of some Americans continues to rise is that they are not equipped with the right financial knowledge to help them repay their debts more conveniently. In this post, you will learn more about debt consolidation, a crucial financial strategy that can make debt management effective and improve your financial health.
What Does Debt Consolidation Mean?
Debt consolidation is the combination or merging of several debts into a single payment, making it easier to manage, thereby saving time, effort and money. This process often involves taking a new loan with favorable lending terms to offset the pending debts. Debt consolidation is often a good consideration for borrowers with high-interest loans. It is only possible if your credit score has gotten better since you applied for the previous loans. If you’ve not evaluated the conditions that led to your present debt state, it is best to pause with debt consolidation plans till you find a solution.
Benefits of Debt Consolidation
Debt consolidation has been seen to help consumers pay off their debt in a more convenient way. According to statistics from U.S. News, 69% of borrowers revealed that their finances got better after debt consolidation. And this same number would be willing to recommend debt consolidation to their loved ones.
Here are some of the perks of debt consolidation that you can take advantage of
Merge Multiple Payments Into One
The primary idea of debt consolidation is to combine all your payments into one. This means that each month, you’ll only have to make one payment, thereby reducing the chance of late payment or defaulting on the due date.
May Reduce the Interest Rate
If your credit score has gotten better after you applied for some loans, your total interest rate may reduce when you consolidate your debts. Your credit score is a big determinant in the type of interest rate to expect during debt consolidation. Irrespective of your credit score category, the new interest rates are likely to be lower than your present payments.
Improve Credit Score
If you are looking to boost your credit score, debt consolidation can be the game changer for you. Paying off multiple loans reduces the credit utilization ratio, which positively impacts your credit score. Debt consolidation allows you to easily manage all payments- at once, which suppresses the prospects of missing due dates. This gives you a better payment history in the long run that will positively impact your credit score.
Deal With Only One Creditor
Getting to manage one creditor is a significant advantage of debt consolidation. Dealing with one creditor instead of multiple ones increases your chances of negotiating for better terms. If you have a good payment history, you can negotiate flexible repayment plans, reduced interest rates, etc.
Types of Debt Consolidation
There are several ways to consolidate your debts, and each method can get you out of debt and save your finances.
Balance Transfer Credit Card
This option mostly comes without interest or a lower interest rate. With the balance transfer credit card, you can move balances from the credit cards and other debts to the new card. You can transfer debts and balances from high-interest rate credit cards to a new card. It is vital to get a balance transfer card with a low annual percentage rate (APR) and a high credit limit to contain all the balances. With this option, no collateral is needed, and it is often easier and faster to get than other loans.
Home Equity Line of Credit
Home equity is the difference between your home’s value and your mortgage debt. If you have a good credit history and sufficient equity as a homeowner, you can borrow some equity at an inexpensive rate for debt consolidation. Home equity loans, which are often large, come with a fixed monthly interest, fixed rate, and longer repayment terms.
Debt Consolidation Loan
If you qualify for a low interest rate, taking a debt consolidation loan is a great way to consolidate debt because you will get enough money to foot your debts with a convenient repayment term. Most debt consolidation loans are unsecured, so your borrowing limit and rate depend on your credit profile.
Common Mistakes to Avoid in Debt Consolidation
To ensure that debt consolidation works to your advantage, it is important to learn some of the common mistakes that some people make.
Not Exploring All Your Options
To pay off your debts and have peace of mind, you need to be open to a wide range of options. Consider some alternatives like applying for unsecured or secured loans, merging your credit card debt, and moving them to a balance transfer card, etc. It is also important to seek the expertise of a credit counselor to help you strategize on improving your financial health.
Not Understanding the Reason for Your Debt
If you don’t know how and why you have big debts, you might repeat the same financial mistakes in the future. You can begin by evaluating your spending habits and identifying the ones responsible for your present situation. Before you opt for debt consolidation, decide to avoid repeating the habits that made you accrue huge debts.
Not Working On Your Credit
Some consumers are unaware that your credit has a pivotal role in determining the interest rates that lenders give. Before undergoing debt consolidation, consciously work on improving your credit by checking your credit report, searching out errors, or seeing a credit repair counselor or company for assistance.
Conclusion
Before making any financial decision, it is important to thoroughly assess your situation to determine if your next set of actions will be beneficial in the long run. If you’re considering going for debt consolidation, remember that you will be able to combine all your debts into one, which will improve your credit history and enhance your overall financial health. Do not hesitate to consult a financial expert to offer more guidance every step of the way.