A proven strategy for dealing with high-interest debt such as large credit card balances, debt consolidation has a number of benefits of which it’s useful to be aware. By the same token, it also has a number of caveats you’d be wise to consider as well. With those points in mind, let’s take a look at what you can expect from debt consolidation.
How It Works
As we mentioned above, debt consolidation is best applied to situations in which one has an abundance of high-interest debt. As the term implies, this approach finds one combining all of those obligations into a single instrument. This could be a consolidation loan, a balance transfer credit card, or a home equity-based loan.
In essence, you’re borrowing from Pamela to pay Peggy, Priscilla, Paul, Peter and any other people to whom you’re indebted. Your goal is to combine all of those debts into one at a lower rate of interest than the average you owe on all of the others. This saves you money on interest payments and could shorten your payoff time as well. If you get it absolutely right, you’ll have lower monthly payments too.
What You’ll Need to Make it Work
Good Credit: First and foremost, you’ll need a strong credit score to get the maximum benefit from any debt consolidation strategy. Again, one of the key pieces you’ll need to accomplish lowering your overall interest rate. Thing is, the lowest rates are typically reserved for people with credit scores of 670 and above, according to Experian, one of the leading credit reporting bureaus. This is not to say you can’t make it work if your score is lower, you’ll just be cutting it a lot closer.
Expensive Debt: It’s possible to find a debt consolidation loan with interest in the nine percent range (as this is being written). Given the average rate on credit card debt is in the 20 percent range, you can see how a consolidation loan will stand you in good stead. In other words, the higher the interest rate on your outstanding debt, the more likely you are to come out ahead.
Steady Income: You must be certain you’re in a position to repay the loan according to the terms to which you agree. Otherwise, you’ll be making a whole new problem for yourself. This is particularly true if you employ home equity as a consolidation vehicle. You’ll need to offer your home as collateral to secure that type of loan, which means the lender could force you to sell your house should you default. It’s critically important to know you can pay.
Stop Charging Things: One of the dangers of debt consolidation is that it leaves you with a hand full of credit cards with zero balances. If you have yet to get a grip on your spending habit (assuming that’s what got you into trouble in the first place) you’re going to find yourself in even deeper debt. You’ll have the consolidation loan with which to deal each month, as well as the new credit card bills you’ll create should you succumb to the temptation.
Knowing what you can expect from debt consolidation positions you to better take advantage of the opportunity it affords. This also helps you understand the pitfalls you need to avoid. Debt consolidation can be a great solution to a credit problem, however, it works best in certain situations. Before accepting a loan, be certain you stand to benefit by paying attention to the tips above.
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