Learn About Debt Consolidation

Creating a debt consolidation plan can be beneficial for many residents. Americans who have several debts with various creditors can benefit the most from debt consolidation.

Seniors can simplify their repayment plan and potentially save money. In addition, participating in a debt repayment plan can help residents pay off their debts faster. Those with a total debt is no more than half of their current income can benefit the most from debt consolidation. Moreover, borrowers must have a sufficient credit score to qualify for a low-interest debt consolidation loan or credit card with zero interest.

Debt consolidation may be the right option for repairing credit and reducing debts as long as participants regularly make their payments. However, residents must have a plan to keep themselves from repeating the same debt issues in the future. Furthermore, debt consolidation is not the best plan for everyone. In some cases, it can be more harmful than helpful. Read the information below to discover if debt consolidation is right for you and your financial situation.

What is debt consolidation?

Debt consolidation involves combining all existing high-interest debts and combining them into a single debt under one creditor at one low-interest rate. Doing this simplifies repayment as debts from various creditors have different interest rates.

In addition, a new consolidated payment plan may result in a lower monthly payment. On borrowers’ credit reports, debts owed to former creditors will be shown as charged off and the new credit account with a debt consolidator will be displayed. Residents will experience a positive effect on their credit as a result of their debt consolidation plan as long as they make their payments and keep their account in good standing.

There are two ways that borrowers can consolidate their debts. These include:

  • Fixed-rate personal loans: Residents can take out a personal loan with their bank or creditor at a low rate in order to pay off their numerous debts. This way, they only need to pay off a single loan instead of several accounts under different creditors.
  • Transfer a balance to a zero percent interest rate credit card: Borrowers can find a credit card with a zero percent interest rate promotional offer. This promotion must apply to balance transfers. Then, residents can transfer all of their debts to the card and pay off the full balance before the promotion expires. However, seniors should understand details about credit cards before applying for them.

The above options are the most popular methods of consolidating debt. However, borrowers can also take out a loan on their 401(k) retirements accounts or homes. Taking out a loan on a house or retirement account can be risky. Therefore, residents considering debt consolidation should consider all factors before deciding to take out a new form of debt. The best plan is one that coincides with borrowers’ current financial circumstances and future plans.

What are the benefits of consolidating debt?

One of the primary benefits of consolidating debt is the decreased interest rate that typically results from combining debts into one payment plan. However, borrowers can receive are other benefits as well. Typically, consolidating debt makes it easier to make monthly payments. Residents can usually pay off debt faster and spend less paying it off while positively impacting their credit scores.

Furthermore, residents only have to make a single monthly payment on their debts rather than several. A single payment can simplify finances and which makes payment easier for many residents. Additionally, the responsibility of one payment can help prevent defaults or late payments as there is only one payment due date to remember rather than several.

It is possible to pay off combined debts faster with a debt consolidation plan. Debt consolidation enables borrowers to pay more toward their principal rather than the interest rate. Thus, by paying off more of the principal, the total debt can be paid off at a faster rate.

Furthermore, as residents pay down their principal, their interest on new balances continually decreases. As a result, borrowers pay less on their debts over time.

What is the effect on credit scores?

Although debt consolidation is meant to positively affect borrowers’ credit, it does still pose some risks. Residents’ credit scores can still be negatively affected even if they comply will all of the terms of their debt consolidation agreement.

Creditors analyzing borrowers’ credit history to determine whether to grant them credit may view debt consolidation, as a negative aspect of their history. Whenever residents take out new forms of credit, the average length of their total credit history is reduced. Thus, their credit scores decrease.

Similarly, closing a credit account also reduces borrowers’ credit scores. When residents close credit accounts, they reduce the total amount of credit they have available. Thus, their credit scores are negatively impacted.

A way to avoid negatively impacting credit scores is by keeping accounts open even after they have been charged off. However, different creditors have different methods of assessing credit scores. As a result, residents’ may have different credit scores depending on the factor that a creditor examines.

Learn About the Drawbacks of Debt Consolidation

As mentioned previously, debt consolidation is not the right option for everyone even if it offers numerous benefits. For instance, residents who have poor financial habits and do not have discipline when it comes to spending may not do well in the long term. Their debt consolidation plan may not be long term if they cannot consistently manage their finances, such as constantly going on vacation they cannot afford.

In addition, borrowers who do not maintain the discipline to make regular payments will be less likely to make progress in their debt consolidation plan or improve their credit scores. Moreover, debt consolidation is not a good plan for those who do make enough income to contribute to their small, low-rate payments.

Residents with minimal debts should not participate in a debt consolidation plan. For instance, borrowers who believe that they can pay off their numerous debts in six months to one year should not change their current repayment plan. A debt consolidation plan in that case may be more harmful than beneficial. Residents who are already able to manage their finances on their own should not partake in a debt consolidation plan.