When is it Wise to Consolidate Your Debts?

For some people, consolidating credit card and other debts can be a smart thing to do, but not so for others.

While it may sound like a good idea at first, it may not actually be, depending on the type of debt consolidation loan you're considering. Here we'll discuss both the pros and cons of consolidating your debts.

There are two ways to consolidate your debts – by getting a loan through your local bank, and by enrolling in a debt consolidation program.

To qualify for a consolidation loan at your bank, you must not be behind on your monthly credit card or other loan payments. Your bank is a lending institution, so as with any other type of loan, you will need to have a good credit score to qualify.

A debt consolidation loan should have a lower interest rate than your individual credit cards and other loans such as car loans. So, wrapping all of your payments into one loan at a lower rate can save you bundles of money in the long run.

However, it could actually cost you more overall because the debt consolidation loan may stretch out over a much longer period of time than if you had paid off each individual debt without consolidating.

But if you're finding it hard to keep up with your monthly payments in a timely manner, then consolidating your debts this way is probably a wise decision. If your financial situation changes for the better, you should make larger monthly payments to pay off the loan sooner, which will save you money.

In addition to saving money, consolidating your debts allows you to make a single loan payment every month, so the amount of time you spend paying your bills is reduced.

This type of debt consolidation loan may also improve your credit score. Because a portion of your score is based on the amount of credit you have available compared to the amount you have used, showing a zero balance on the credit cards and loans you paid off with the consolidation loan could boost your score.

You do not want to close those accounts when you have paid them off. Instead, let them remain open, then showing available, but unused, credit lines.

A word of caution – do not be tempted to start using those credit cards or you may find yourself overextended on your monthly payments due.

Consolidating your debts in this manner for the sake of lowering your interest rate, thereby saving money, is usually the best route to go. Just be sure to take into consideration the time period of the loan and the total amount you will have paid at the end.

The other type of debt consolidation loan is through a debt consolidation program. This is for those who are behind on their monthly payments and need help keeping their heads above water, so to speak.

When you enroll in a debt consolidation program, the company will contact your creditors and request that your interest rates be lowered or the monthly interest stopped completely, as well as discontinue late payment fees and arrange for them to accept lower monthly payments.

You will make one monthly payment to the debt consolidation company and they will dole out the money to each of your creditors on a monthly basis.

The drawback to this type of debt consolidation is that it will probably have an adverse effect on your credit score. However, it's much better to consolidate your debts this way than to default on your credit cards or other loans if you find yourself in dire financial straits.

Most debt consolidation companies will insure that you surrender all credit cards covered by the plan, so that you can no longer buy items with them.

This can sometimes be a difficult step to take, especially if you like to have credit available in case of emergency. But it may be necessary in order to get your financial situation back on track for the future.

Once you have decided to go through with the consolidation you will realize that your monthly payments have shrunk consideration, which will leave you with spare cash to pay for things you may otherwise have been charging in the past.

All in all, consolidating your debts can be a very sensible choice. By merging all of your financial commitments into one monthly payment you will find yourself on the road to becoming debt free in the near future.

Source by MartiJo Grayson

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