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Debt Consolidation: Everything You Need to Know

debt consolidation

If you’re facing a seemingly insurmountable debt level and are reviewing the financial market for options, then debt consolidation could be your best choice.

Debt consolidation is the process of combining your debts into one payment so that you’re only dealing with one debt repayment and one interest rate. The goal is to help build a foundation for a successful financial future and alleviate the stress involved in managing multiple debt payments.

Let’s delve further into the steps involved in debt consolidation.

How does debt consolidation work?

As part of the debt consolidation process, you’ll work with your creditor to establish a new loan that allows you to pay off all of your existing debts.

Generally, the new loan will have a far lower interest rate than your current debt repayments. For example, if you have a higher credit card debt, you may use a debt consolidation loan to establish an interest level that’s a fraction of the credit card interest. Using a loan is considered one of the most common and effective methods of recovering from overwhelming debt levels.

What are the outcomes of debt consolidation?

There are numerous outcomes associated with debt consolidation; these include:

Open a Hard Enquiry on Your Credit Report 

First, the debt consolidation will create a new hard inquiry on your credit report. The hard inquiry might temporarily reduce the amount of credit available to you and lower your credit score in the short term.

Open a New Credit Line

Debt consolidation will also open a new line of credit within your report. A new credit line might also lower your credit score temporarily. However, it also shows the credit reporting companies that you are closing your current debts and placing all of your debt into this one new loan. And so, over time, this will help you rebuild your credit rating.

Enhanced Credit Utilization Rate

Your credit utilization rate is the amount of credit you’re using compared to the amount of credit available to you. When you start a debt consolidation loan, you eliminate numerous credit card debts and other loans. So, your credit utilization rate will improve as you start your debt repayment plan.

Improved Payment History

Your new repayment plan will also allow you to develop an improved payment history. When you show financial institutions that you are repaying debts consistently within a shorter time frame, your credit score can improve. You may then be able to capitalize on other financial products available from your institution.

Lower Your Age of Credit

While there are many benefits to a debt consolidation loan, it’s important to note that the loan will lower the age of your credit since you’re establishing a new payment history with the institution. Lowering the age of your credit and reestablishing financial relationships may temporarily reduce your credit score.

What are the main debt consolidation strategies?

There are specific debt consolidations available based on your assets, income, the type of debt you have, and your credit score. The main debt consolidation strategies include:

  • Credit Card Balance Transfers

A credit card balance transfer involves opening a new credit card with a low or, ideally, zero-percent interest rate. Then, it moves your debt to the new card. The goal is to reduce the amount of interest you pay on the debt by transferring the money to this new credit card.

There may be a limit to how much money you can move to the new card, and you will likely pay a balance transfer fee.

  • Lines of Credit

You may also apply for a line of credit to repay your current debts. The line of credit will likely be a lower interest rate than most credit card debts, and so you will save money over the entire repayment process. However, to benefit from a line of credit, you must have a pre-existing relationship with the institution and a strong credit score.

  • Home Equity Loans

Another option might be to use the current equity in your home as collateral for a loan from your institution. Harnessing equity is the perfect option for many property owners while the mortgage rates are low, as they are now, and home values are high. However, this can put you at risk of losing your home if you cannot keep up with the loan repayments.

  • Debt Consolidation Programs

A great benefit of debt consolidation programs is they are available to you even if you have poor credit. Agencies running debt consolidation programs typically allow you to consolidate all of your debts into one loan, and then provide you with education to guide you in improving your finances for the long term. These programs are usually a good option for younger people trying to effectively manage their finances as they enter a period of financial difficulty.

  • Debt Consolidation Loans

A debt consolidation loan is perhaps the most common form of debt consolidation service and the service that best fits the needs of the majority of people. This loan from your financial institution helps pay off your existing debt and replace many payments with one monthly payment.

Generally, you must have a good credit rating and show the institution you’re committed to repaying your loans to benefit from this loan service.

Rebuild Your Finances with Debt Consolidation

Debt consolidation is the perfect option if you’re worried about your monthly debt repayments. Don’t stay awake at night worrying about finances. Instead, choose a simple service that can help you refocus your budget and build a foundation for a successful future.

By consolidating your debts, you’ll lower your interest rate and pay off your debts in a shorter period. There are many options available when you take the time to analyze each strategy in detail.

The first step is speaking with financial experts in your area about your debt consolidation options. Remember to review all paperwork clearly and take the time to examine each consolidation service in detail before finalizing your decision. The path to a brighter future begins today.

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