The Advantages of Consolidating Your Debts

The Advantages of Consolidating Your Debts

Many of us have gone through situations where want to make a huge purchase, or we’re faced with sudden emergency expenses that quickly drive us into high-interest debts. Before we know it, we’re smack in the middle of monthly credit card and loan bills that have slowly accumulated and have gotten out of hand. 

Whether it’s to buy a new home or to fund for your education, debt can happen with a blink of an eye and lead us into financial situations that might eventually be difficult to control. While this can be unavoidable, knowing how to manage your debt is important. 

One effective approach to better cope with paying your debt bills is by consolidating it. A debt consolidation program allows you to streamline your debts by rolling all of your credit into a single payment. This often comes with a reduced interest rate as compared to what you were paying each month with all your other creditors and will also give a nice boost to your credit score in the process.

Some methods of consolidating your debt are by taking out a personal loan, applying for a 401 (k) loan, or using a home equity loan and then using these loans to pay all of your other minuscule loans. Or, you can also consolidate debts by moving all of your debts into one single credit card. 

All of these routes have their benefits, it all depends on which alternative is easier, quicker, and workable for you. You’ll know which method to take by weighing in the advantages of debt consolidation: 

1. It Simplifies Your Payments

If you’re like most people with multiple credit card debts, you’ll most likely find it convenient and hassle-free to consolidate everything into one single account. Debt consolidation programs allow you to streamline your debts. It can even result in lower monthly payments because of a longer payment term. Although your debt will still exist, however, you no longer need to worry about making multiple payment deadlines, multiple fees, and penalties, and you can focus on a single source of credit. 

2. It Reduces Your Interest Rates

A lot of unsecured debts, like credit card debt, charge extensively in interest rates and could significantly increase your monthly payments. By paying off your multiple high-interest debt accounts with a single lower interest loan, you will be able to combine all of your debts without having to pay much. This is especially true when you have a good credit record, this is because your credit score is the biggest determining factor when it comes to your financial options. The interest rate you get for your loans is highly dependent on it, so you can expect to pay for a lower rate when you consolidate your debts if you’re confident that you have an optimistic credit track. 

The average interest rate for those who have outstanding credit (720-850) can range anywhere between 4-20% as compared to those with poor credit (300-639) who might end up with an interest rate of 15-36% when applying for a debt consolidation program. 

Whichever credit score bracket you find yourself in, the possibilities of paying less than what you owe when you pay for multiple credit cards will still be lower. 

3. It Boosts Your Credit Score

Because your credit score is a huge factor when you apply for credit, maintaining or regaining your good track record on it is essential. Consolidating your debt helps give your credit score that nice gentle push. Getting into a debt consolidation program by taking out a personal loan helps to increase your score in just a few months as the loan will help you to reduce your credit utilization rate.  

The credit utilization rate, also known as the credit utilization ratio is a figure derived from the amount that you currently owe, divided by your credit limit. If you have a total of $5,000 in credit available on two separate credit cards, with one of them having a balance of $2,500, the credit utilization rate is 50%, because you are using half of the entire credit available. Balance utilization plays a key role in your credit score rating.

Bear in mind, however, that it is natural to see a slight, temporary decrease in your credit score if you get new credit, but the long-term benefits you’ll reap in both your credit score and interest savings when you consolidate your debt make it a financially sensible step.

4. It Eases Your Stress

Clutter can be stressful and having to pay several different creditors every month can feel very much like financial clutter. Consolidating your debts helps you to restructure your finances, putting multiple debts into a single account makes things more financially manageable for you and can greatly ease your stress while clearing up the muddle that multiple payments can very much feel like. 

Money problems such as debt are known to trigger stress but they don’t have to. You can clear your mind and find yourself in a stronger financial position by taking care of your finances and enabling yourself to remain on top of your single monthly debt payment.

5. It Shortens Your Repayment Options

It is not unusual to have years to go before your credit card debts are completely paid off. After all, credit cards collect interest on what you owe, and creditors don’t mind if paying off your debt takes 5 years or 20 years. One benefit of debt consolidation is that the consolidation process takes into account several factors when deciding the duration of the loan, such as income, credit score, and how much you owe to come up with a practical repayment plan. This is mainly why loans for debt consolidation have shorter repayment terms. 

Just like all other financial decisions, you ‘re going to want to carefully assess your own situation to decide if debt consolidation is the right move for you. However, the substantial benefits to be gained through it, such as, simplifying your monthly payments, lowering your interest rate, minimizing stress, and boosting your credit score also makes debt consolidation a practical and worthwhile choice.

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