It has been a while since we have discussed debt consolidation. And whilst we have broached this subject before, it is always good to revisit and reconsider every now and again. With that in mind, we ask: is debt consolidation a good thing?
Is Debt Consolidation A Good Thing? – What Is It?
As the name suggests, the process involves grouping multiple debts into a single debt, which then naturally results in a single payment each month. Its most common use is for credit card debt. Alternatively, it may be used for other types of unsecured debt, perhaps even multiple loans.
How It Works
The process involves you determining a new lender, and filling in an application form that informs the lender what debts you wish to move across to your new card. You will list the amounts, and the lender will state clearly the fee for doing so. Usually this is a percentage fee, so the more you move across, the bigger the fee. A common figure is 3%. Then after acceptance, your other cards are free of debt, and you hold this one big debt at a single source. You must then pay off that debt as per usual, with monthly payments. Hopefully, your new interest rate will be zero or a low rate, hence the consolidation. There is little point doing it otherwise.
Is Debt Consolidation A Good Thing? – Credit Score
Many express concern that applying for and taking out credit will have a negative effect on their credit rating. This may well be true, but anyone who takes on debt and pays it back as per the terms of the agreement will see a net positive result over time. The initial application may see your score dip briefly, but as long as you make regular repayments, this is nothing to worry about.
When To Use Debt Consolidation
The simple fact is you must do the maths and decide what the best course is. It is very simple at the end of the day. Comsolidate debt if it saves you money! See, not that complicated! There could be other reasons to consolidate. Some like the convenience. Some may need lower monthly repayments, even if the total amount repaid is more. It may be worth their while, and if you are comfortable doing that, then fair enough. But for me, the main consideration should be whether the total amount you pay back by moving debt is lower or not,. If lower, it is clearly worth your while, as long as you can fit the new monthly repayment within your budget. You should consider debt consolidation for large debts, and if you want to reduce your debt interest rates, and thus your monthly payments. You may also have imminent debt problems that need a resolution. Do your research, and know the figures involved.
Is Debt Consolidation A Good Thing? – How To Do It
There are several common methods for consolidating debt. The main one as already mentioned is to move debt across to a single credit card using a zero percent interest offer. you pay a fixed fee, and then for an agreed period, no interest is charged on the balance on that card. Alternatively you could sign up for a credit card that offers no interest charges on purchases, allowing you breathing space to pay off debt. Or you could take out a loan on lower interest rates that supplies you with the funds to pay off historic debt. Many may even consider using the equity in their home to pay off debt.
Disadvantages?
Transferring money will always come with fees, so ensure that you save more money than it costs you. Consolidation of debt may reduce monthly payments, but it may extend the repayment period. It may even increase the total amount you end up paying back. And if you still have outstanding balances on a card after an offer period expires, then you are back to paying sky-high interest rates again.
Conclusion
Debt consolidation is a handy option for millions, but ensure it is the right path for you. You must understand that it does not reduce your debt, it simply moves it. So it is worthwhile if it reduces the associated costs that go with debt, most obviously interest rates. Use it as a tool for moving towards eradicating debt as soon as possible.
