Debt Consolidation: Advantages and Disadvantages

Debt Consolidation: Advantages and Disadvantages

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Many times a consolidation remedies an issue but does not solve a major financial problem.  Before determining if this strategy is right for you, explore the causes of your debt and evaluate other options.

Advantages and Disadvantages of Consolidating Credit Card Debts

Many times the debts of the credit cards are about to get out of control and it is necessary to take action to avoid becoming over indebted. A common repayment strategy is the consolidation of debts. Through a consolidation, you get a loan to settle your credit card accounts and you are responsible for paying a single loan. Most times to consolidate credit cards is not ideal for everyone, so you should inform yourself about it, and the advantages and disadvantages to make the best decision.

The Advantages :

Combine Several Payments in One:  Learning More about debt consolidation helps you to organize yourself and the convenience of making a single monthly payment.

Obtain Lower Interest: If you have good credit, most of the options to consolidate your debt, either a personal loan or a line of credit on your home, offer you lower interest rates than those of credit cards.

Reduce Monthly Payments: If the interest on your new loan is lower, it is possible that your monthly payment is also lower. Also, if you pay on time and consistently, you would avoid any type of penalty for delinquent payments and for exceeding the credit limit.

Pay 100% to Your Creditors: It would liquidate debts to your creditors and preserve a positive payment history if the accounts have been in good standing with your creditor.

The Disadvantages

It may cost you more money in the long run. In spite of obtaining an interest and reduced payments, if the repayment period is extensive, at the end of the life of the loan you may end up paying more. In addition, depending on the consolidation method you use, your total debt may increase with the addition of charges associated with the loan or fees for transferring balances from one card to the other.

You Will Borrow More: Either by necessity or by will, if you reuse the cards you already paid, you would face paying the original debt plus any new debt.

It May be More Expensive: If you consolidate your cards with a secured loan, such as a line of credit on your home, failing your payments puts you at risk of losing your home or any other valuable possession you have used to secure your loan. You should avoid putting at risk things whose total value is greater than the number of your credit cards.

Negative Effects on Your Credit: Consolidating debts can affect your credit score by changing the use of your credit. You do not eliminate the debt, but combine it and affect the balance of debt and available credit. If you close your paid credit cards, you also suffer your score.

Conclusion

Many times a consolidation remedies a problem but does not solve a major financial problem. Before determining if this strategy is right for you, explore the causes of your debt and assess other repayment options such as a Debt Management Program, self-payment strategies or work directly with your creditors.

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