Why Is Consolidating Debts The Best Idea To Go With?
Debt consolidation is not hard to understand, not hard to apply, and not hard to go along with overall.
So, is it a good idea to consolidate debts, when you have uncontrollable and numerous personal debt accounts?
You should try to consolidate your debts, especially if all you are having are unsecured debts, and that too of high interest rates!
Debt consolidation has never been so easier to cope up with as it is now. Given the ongoing and current options available in the debt market, one can easily follow a DIY(Do It Yourself) debt consolidation process, and get rid of their debts without taking any professional help.
But, whatever methods you want to use so as to consolidate debts, you should be clear with what consolidation is all about, and how it helps you to save both money and time.
What is debt consolidation and how does it work?
Debt consolidation is a type of debt relief process which involves bringing all your debts into one place or account, therefore having one median interest rate, and one single fat debt amount to pay off.
But, here’s what you need to know. Debt consolidation only works for unsecured/consumer debts.
These are the debts that have no collateral attached and are made of general household debts, like credit cards, payday loans, personal loans, and such types of credit.
Debt consolidation doesn’t work for secured loans like mortgages or car loans. Such loans by default have marginal interest rates, and a fixed payment plan. Debt consolidation can never be applied on them.
On the other hand, unsecured debts like for example credit cards, have high interest rates and often times people carry more than one or two credit cards.
In those scenarios, where you have multiple credit card debts to pay off, debt consolidation plays a big role by helping you to coagulate all the different debts into one place for the ease of payment.
Hence, to cut it short, yes it is a good idea to consolidate debts.
For a better understanding though, we will be breaking down,
In what ways debt consolidation proves to be beneficial for paying off debts:
- Debt consolidation gives a credit score boost and a good rating for the debts:
It is quite remarkable to take a look at how debt consolidation forces your credit score to rise gradually.
Your credit score is made up of one big factor called credit history, and a sub-factor called credit utilization ratio.
Our concern will be the utilization ratio as of now.
When you are consolidating your debts, most preferably you will be taking out another big debt to pay off your past debt amounts, as per the traditional process.
Once you do so, your past debt accounts get paid fully, and start to show up as “paid as agreed” on your credit report. This enhances your credit history and most importantly lowers your credit utilization ratio.
The lower this ratio the better. It is calculated as your total outstanding debt balance divided by total available credit limit. The calculation is best understood when multiple credit cards are consolidated.
This is also known as a credit card balance transfer, and is the most popular one among all credit card consolidation programs.
If you previously had 2 maxed out credit cards:
CC1: Limit – $1000, Out. Bal – $1000
CC2: Limit – $1000, Out. Bal – $1000
Then your past utilization ratio would be (2000/2000) * 100% = 100%. That’s a real bad ratio figure to hold on to.
Now, say you take out another credit card with a credit limit of $2000, and pay off your past debts.
If you don’t close your previous cards, then your current utilization ratio will be, (2000/4000)*100% = 50% (it is far better than a 100% ratio)
This way debt consolidation boosts your credit score. The same theory is applied to other consumer debts as well, only the calculation gets a bit tougher.
- You get one single scrapped down average interest rate, and a single monthly payment for all your debts and save money along with:
In general, when people consolidate debts, they take out a consolidation loan to pay off their existing debts. For credit cards, even though the best choice is balance transfer, still you can take out a consolidation loan and pay them off.
But, for multiple personal loans, small credits, and/or payday loans, taking out a consolidation loan is the best move, when you are planning to consolidate debts on your own.
So, when you use a consolidation loan, and pay off all your debts, you will be left only with this new loan, having a comparatively lower interest rate than the summation of all individual rates that you were tackling previously for each of your debts.
This also means that you will now have to make only one monthly payment for this loan.
You can be pretty much assured that one interest rate will help you to save a lot of money, and one monthly payment will be easier to keep track of!
- A professional debt consolidation process will provide you with a monthly budget plan:
Lastly, if you approach a debt consolidation company, then you will get a monthly budget plan.
In a professional debt consolidation process, you will not have to take out a separate debt. Rather the company will talk to your creditors and make an agreement.
You will then be making one monthly payment to the company, which will then be disbursed among your creditors, by the company, as per the agreement.
To make sure, that you never skip on this monthly payment, the company will make up a budget plan for you based on your income and expenses.
The company can also try to negotiate the debt amounts or the interest rates when possible.
Guess, by now you understand, why is it a good idea to consolidate your debts, instead of maintaining multiple payments for multiple debts.