People who consolidate their credit card debt with a debt consolidation loan can improve their credit rating over the long term if they consistently make their payments on time within a period of one to two years. But, it can also damage your credit score if you fail to make payments on time and are unable to meet the terms of the debt consolidation loan. Many financial loans creditors base their decisions on whether to extend credit on your current credit payment history even if you have had trouble in the past and don’t have that great of a credit score. If you consolidated your credit cards with a debt consolidation loan and are making regular payments on time, potential financial lenders will observe that all your credit card debt has been paid and you are managing the debt consolidation loan responsibly. More financial lenders are willingly to extend credit to you, thus giving you an opportunity to rebuild your credit. As long as you continue to manage your credit responsibly and within your realistic financial means, your credit rating will continue to improve. A debt consolidation loan will not improve your credit rating over the short term as it takes a minimum of one to two years of consistently paying back the debt consolidation loan before you will begin to see increases in their credit rating. It takes commitment and time to rebuild your credit rating. Now that your credit cards are paid in full with the debt consolidation loan, keep your credit card charges to a minimum, paid in full, and on time. This will reflect positively on your credit rating as well.
Disadvantages of Debt Consolidation Loans
Debt consolidation loans are not for everyone as it depends on each person’s financial portfolio and whether they have the ability to repay the loan. A debt consolidation loan can very easily contribute to your debt problems if you are not careful and unable to meet the terms. The most fundamental disadvantages of a debt consolation loan: 1. A huge risk to your assets if you are unable to pay back your debt consolidation loan in a regular and timely manner. Many people choose a secured debt consolidation loan because the interest rate is generally much lower than an unsecured debt consolidation loan. If you are unable to repay your debt consolidation loan, you will lose the assets which are mostly houses that were used to secure the debt consolidation loan. 2. If you run into trouble and you reduce your debt consolidation loan’s monthly payments even lower, it comes with the cost of increased interest rates and longer terms meaning it will take longer to pay back your debt consolidation loan at an increased interest rate which increases your debt load. 3. You can end up accumulating even more debt adding additional monthly payments along with your debt consolidation loan monthly repayment. It is very easy to slip back into old habits and start charging up the credit cards again because of the available credit. This increases the likelihood that you will be unable to pay back your debt consolidation loan and credit cards on schedule which again increases your total debt load. 4. If you have poor credit, you will likely have to pay a high interest rate on your debt consolidation loan which may actually be more than you are currently paying on your debts. The debt consolidation loan will generally be over a longer term to accommodate the higher interest and still make the monthly payments manageable. The result is that you end up paying more over the long run and it usually takes a lot longer than it would have if you had paid each debt back individually.
Why it Makes Financial Sense for Debt Consolidation
Many individuals are making less money today than they did in years past. Downsizing of corporations plays a part, as do inflation rates that exceed income. Whatever the reason, many people are looking for ways to reduce their monthly payments.
It makes good financial sense for mortgage companies to offer debt consolidation to help consumers reduce their debt.Debt consolidation benefits individuals in several ways. Through consolidation, it makes it easier to pay bills. All of the unsecured debts, which come from credit cards, department store cards, cell phone bills, medical bills, legal bills, and personal loan bills, are bundled together, so that instead of writing several checks for different amounts, you write one check for the same amount each month.Consumers also find debt consolidation appealing because it usually reduces the interest rates that they are paying. Unsecured debt rates are higher than those rates paid on secured debts. Secured debts are secure because the creditor is given certain rights to the property in question if the loan is not paid back as agreed upon by both the creditor and debtor. Secured debts include items such as a house payment or an auto payment. Because the debt is secure, the creditor is able to offer a lower interest rate because they face less of a risk in lending the money.For those with credit cards, minimum monthly payments have recently doubled. That, along with the high interest rates that are often charged on credit cards, is why many people want a fixed rate that can be obtained with a debt consolidation loan. In this way they know how much they will owe each month, and won’t be subject to rising, fluctuating changes in their payments.
Debt Consolidation, a Help or a Hindrance?
Debt consolidation seems easy enough. You’ve got credit cards, department store credit, a car loan, maybe even a personal loan too. You are making many different payments, which are taking a big chunk of your income. On top of that, those balances seem to be going nowhere. So…Why not put all of your debts under one umbrella and make one (lower) payment? After you read this article if you think you can make it work and would like to investigate some ideas consider a high interest credit card debt consolidation. That lower payment will free up some money each
month. Sounds great. What could be wrong with that? Well, nothing and a lot.It all depends how you lump those debts, the type of loan or program you use to consolidate debt, and what you do with those newly zero balanced credit cards and the extra money you have freed up. You can really work hard to eliminate your debt or you could end up in serious trouble. Let’s compare… Visit Trouble FirstYou want to recognize it so you can avoid it. If you choose the most common route you will secure your consolidation loan with your home, usually with a second mortgage. This makes sense, since you can usually get a lower rate on the loan and the interest may be deducted off your taxes (check with your tax advisor). But don’t forget about the fees for one of these debt consolidation loans, they can add up in a hurry. And do you really want to pay for your morning coffee for the next 5 to 10 years? Also, if you can’t pay do you want to lose your house? Here is something else to worry about. You have “fresh” credit cards with zero balances. If you are not very careful and do not have a plan in place, you could end up with twice the bills you had before you used debt consolidation… Most people are living beyond their paycheck. Most spend about 10% more than they make on a monthly basis. The only way this is possible is with credit cards. They are renting a lifestyle, not owning and paying for it. It takes only a few months of this type of behavior to max out their cards again. Then they have new balances to pay and their debt consolidation loan too. They have reached a dead end. Now..
Debt Consolidation vs. Debt Negotiation
When you find yourself drowning in debt, you have several options with which to proceed. Two of the most common options are debt consolidation and debt negotiation. These are two very different vehicles for debt reduction, and their usage will benefit some while hurting others. If you are
considering different options for debt reduction, consider both consolidation and negotiation before making your decision.Debt Consolidation vs. Debt Negotiation: Are You Experiencing High Interest Rates?One of the major debt problems Americans experience is the weight of high interest rates. When you’re making purchases on a daily basis, you might not stop to calculate the cost of the item combined with the interest charged until you can pay it back. Credit cards with high interest rates can swiftly enter you into a nasty debt situation, but debt consolidation can help alleviate the strain. When you sign up for a debt consolidation program, you essentially hire a third-party company to combine all of your debts (i.e. multiple credit card balances) into one lump sum with a lower interest rate. This allows you to pay off your purchases faster without the incumbrance of a high interest rate.Debt Consolidation vs. Debt Negotiation: Are You Being Harrassed by Creditors?If you’re in debt, then you probably know it, and the daily calls from the credit card companies probably aren’t going to create money with which to pay them. When you use either a debt consolidation or a debt negotiation program, the creditors will stop calling because you are taking steps toward paying them. This is especially true with a debt consolidation program because the third-party company is handling the problem. With debt negotiation programs, you may still hear from creditors if you aren’t meeting your obligations.Debt Consolidation vs. Debt Negotiation: Are You Unable to Make Monthly Payments?