Debt consolidation is a method of combining various loans and paying them off through a single consolidated recurring payment. It helps in keeping the credit score intact through paying off all the debts through a single loan payment. In U.S., scores of people unfortunately find themselves in significant personal and household debt by the age of 30. In fact, a 2015 study from Pew Charitable Trusts found 80% of Americans are carrying debt. And not all of what they owe is tied to “good debt,” like a mortgage. At the time of that study, 39% of Americans were reporting unpaid credit card balances.
Source: Pew Survey of American Family Finances
How to consolidate debt:
There are numerous companies offering the services of debt consolidation and helps you to effectively manage your debts and gets your financial situation back in form. These companies offer a total lending solution ranging from the preliminary financial analysis up to personalized repayment plans. These companies charge a fee for providing this service. Whichever company you select for consolidating your debts, keep the following general criteria in mind; choose a company that offers a balance of low fee, reasonable interest rates and flexible terms and conditions.
When to consolidate debt:
Although the option of debt consolidation looks very tantalizing from the outset, but it’s certainly not the universally perfect option. The option should only be availed if you are facing a serious liquidity crunch and finding it difficult to pay high monthly interest payments and several credit card bills. Also, if there is no hope in the foreseeable future for these interest payments to get lower.
Mistakes to avoid:
The one common mistake to avoid is that debt consolidation option should be availed once you have decided to stop using your credit card further. If you will use the credit card along with using debt consolidation option, it will not be that much beneficial as you will pile up more borrowings with the credit card usage and will again end up with enormous amount of outstanding credit. So it’s of utmost importance that you change the behavior of undersaving and overspending. Only then the strategy of debt consolidation will work for you. Moreover, always do your math before availing this option by comparing the length of your current credit card loan repayments to the length of the consolidated debt you are planning to take out. Often, the consolidated debt with a longer repayment period costs more, even at a lower interest rate, then if you repay your credit card loan faster without availing this option.
[tweetthis]Mistakes to avoid when consolidating your #debt.[/tweetthis]Benefits:
Debt consolidation is very useful for those who are paying huge amount of interests on their loans and they want to reduce the rate of interest that they are paying at regular intervals. Paying debt with a reduced rate of interest not only helps in saving money, but also speeds up the process of repayment. Moreover, getting all of your financial assistance from one organization would be easier for you to manage your finances and it would make the process of debt repayment simpler and more convenient.
The conclusion is that fiscal discipline is the key to get out of your debt problem. Debt consolidation can prove to be a worthy strategy only if you change your spending habits accordingly and starts living within your means.