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How to take advantage of debt consolidation
Does debt consolidation affect my credit score positively or negatively? The short answer is ? It depends. You should determine whether loan consolidation makes sense depending on your specific financial situation.
To give you the best idea on how to take advantage of debt consolidation let’s first discuss a few crucial matters. When should you opt for debt consolidation? How can you perform a debt consolidation? Last but not least, is debt consolidation going to hurt your credit score or it can actually help you increase it?
When to perform debt consolidation?
Generally speaking, you should consider consolidating your debt if it’s going to help you alleviate your financial struggles. Here are the two top reasons to perform a loan consolidation.
1. If you can’t keep track of all your loans
Many people find it difficult to juggle multiple loans or credit cards. When you have credit with several lenders it can be extremely frustrating to track all payment amounts and due dates.
Often, you can fail to meet deadlines and incur late fees. This also hurts your credit score. So if you find yourself in a similar situation you should take immediate action.
Debt consolidation can be a perfect solution in this case. You can get a single loan from a single lender, typically with a fixed monthly payment, and use it to cover all other outstanding loans you have. This can certainly make your life easier. You have to track only one monthly payment and due date.
The best part is your credit score will increase in the long haul. When you are making timely payments for the right amount, your behavior improves in the eyes of credit bureaus.
2. If you can get a better interest rate and lower the overall debt amount
When you have multiple loans they typically come with different interest rates and annual fees. If you can get a better interest rate on a new loan you might consider consolidating your debt. Why pay more when you can pay (and stress) less?
However, you shouldn’t consider the interest rate alone. The repayment period is an equally important part of the equation. To give an oversimplified example, let’s imagine you currently owe $10,000 which should be repaid in 3 years with a 15% fixed APR payday loans in Sweetwater charged on the principal. That makes a total of $14,500 you should pay for the whole period.
Now, imagine you take out a debt consolidation loan for the same amount with 10% APR and 5 years repayment period. At first, it may seem like a bargain. But the total you will pay is 15,000 which is more than the amount you owe originally.
Of course, your monthly installments will be lower which is an advantage. So it is up to you to decide.
In most cases, credit cards have very high APRs. That is the reason many people consider consolidating their credit card debt with another loan.
It is a great option but there is an alternative to that. You can combine all your current credit card debt into a new credit card with a balance transfer.
If the new credit card has a lower interest rate that is great. However, the best option is to get cards that offer 0% intro APR because these cards provide cardholders a specific time frame where they don’t have to pay for interest (usually between 12-24 months)
