One of the most common financial advice you could get when you have debt problems is to simply consolidate debts and enjoy a stress-free ride. Most people view the program as a great way to a clean slate. This is because as you streamline your financial obligations, all the old ones are gone and replaced by a new loan payment.
Debt consolidation offers consumers the chance to start a new and regains control of their debt payments. You no longer have to be tied up to a vicious monthly cycle of multiple repayments. It is stressful to be thinking about multiple payments every month. You worry that you might miss one and could snowball into a flurry of fees and penalties.
Crosstimbersgazette.com stressed the advantage of consolidating your debt accounts. It makes repayment more manageable having a single set of payment details to think about. Consolidation eliminates the need to constantly worry about your multiple financial obligations. It helps you concentrate more on the things that matter most like family and career.
Benefits when you consolidate debts
Here are a few of the advantages when you decide to consolidate and put your debt payments under one account.
Manage interest rate
The interest rate is one of the most challenging areas of debt payment. It dictates how much you pay on top of the actual amount you borrowed. This is one of the areas most affected when you decide to consolidate debts in your budget. The effect, however, is dependent on how your credit score has changed over time.
Before you try to find out if your rate will go up or down, you need to understand one basic change that can happen. As soon as you consolidate your debts, your interest rate will boil down to one rate. If you are putting in five different accounts into that loan, all those interest rates will boil down to just one.
It is important to note as well that there is a big chance that the rates will just average themselves out. This means that the highest rate you have could go down. However, the low rates that you have could potentially go up. This is a trade-off that you need to study very carefully. With this, you need to consider as well the role of your credit score.
The idea is that you are essentially taking out a new loan to cover for all the existing ones you have. This means that the lender will rely heavily on your credit score to determine your new rate. The higher your score is, the lower your interest rate can be. The lower your score is, the bigger the chances that you will be approved for a high rate.
Streamline due date
It is very frustrating to miss out a payment simply because your forgot to make the payment. You have the money but the due date simply slipped off your mind. You then have to call your lender and explain what happened and hope they do not assess fees and charges. Imagine going through this ordeal month to month because of multiple payment accounts.
When you consolidate debts, you are able to organize all those due dates into one single date. Rather than trying to remember multiple payment dates, you only have to send out a payment once a month. This frees you up and helps you make on-time payments. It prevents fees and other penalties from being slapped on your bill as well for non-payment.
Single payment amount
It follows that if you consolidate debts, you will have one interest rate, one due date, and one payment amount. As you consolidate all details of your debt accounts, your payment amount will also boil into one. This is helpful if you compare it to having to remember various amounts to be paid out at different days in a month.
Improve credit score
This is one side effect of debt consolidation especially if you chose to consolidate debts on your credit card. Valuepenguin.com puts the average credit score for Americans at around 694 and this is quite high. Debt consolidation can help people who wish to improve their score. Though you need to remember that this should not be the goal but it is a welcome development.
This happens because you are able to improve on your credit utilization ratio. As you consolidate your debt, you free up balances on your card. This lowers down your credit utilization which has a positive effect on your score. The higher your score, the better your financial options are in the future such as low-interest rate or even pre-approval on some loan applications.
Stop collection calls
This is probably one of the most enticing parts of consolidating debts especially if you are already behind your payments. It is possible that you get collection calls reminding you to make payments on your financial obligations. This can be frustrating especially when you chance upon a hostile caller who does not care about your financial situation. As soon as you consolidate debts, these calls can stop and you get to have peace of mind.
What not to do
As soon as you proceed with debt consolidation, here are a few things you need to be aware of. Keep in mind that making these mistakes could easily land you back to where you started.
Once you consolidate debts, you need to make sure that you make your payments on time every time. There is no reason why you should knowingly miss a payment or two. Late payments can put you back to the starting point. Always make sure that you are up to date with your payments. Schedule, create payment alarms or simply automate the payment. These can all help you ensure a timely payment.
Add more debt
It is not advisable to keep adding more loan payments after you consolidate debts. This will strain your finances to the point that you might start to miss payments again. This is a common problem since consumers fall into a false sense of credit availability. Since the original balance has been paid off, they feel they can start making purchases again on credit.
Closing all credit cards
MyFICO.com shares that credit payment history accounts for almost 35% of a FICO credit score. The payment history can be found in your old credit cards. If you decide to suddenly cut up all your cards in a bid to stay away from debt, you are doing more harm than good. Know what goes into your score and be wary of disposing of old cards.
What you can look into is to streamline your card use. It is possible that you have a lot of credit cards and you could be tempted to use them every time you go out. It would be best to give up the newer cards which you might have taken up because of low introductory rates. Keep the oldest cards as it can help with your score and let go of new ones.
As soon as you decided to consolidate debts, you are taking charge of your financial future. It is important to know what to expect from the program. This can help you manage expectations. It is crucial as well to understand the things you need to stay away from which could rid you of the benefits of debt consolidation.