Why Consolidate Debt?
There are many ways to deal with debt; paying it off slowly, working with credit counseling agencies, debt consolidation or, as a last resort, bankruptcy. Of these methods, debt consolidation, may be the easier option. Debt consolidation combines all of your debts into one monthly payment. Conceivably, one payment is easier to manage each month than several disparate statements.
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Lower Interest Rates
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Credit cards, personal loans and lines of credit all have different interest rates, and chances are if you have a mix of these, you could be paying some high interest rates. A consolidation loan offers one payment with an interest rate that is typically lower than most credit cards. You do not need to get a consolidation loan to obtain a lower interest rate; you may opt for consolidating all of your credit cards onto one card. Credit card companies often mail offers for balance transfers with low interest rates for a specific period of time. Taking advantage of these offers can offer consumers to pay down some high interest credit cards during the introductory period. It is important to be aware of hidden transfer fees and to look for offers which have a longer introductory period. Plus, having lower interest rates mean that you can pay the down the debt faster.
Reduced Monthly Fee
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If you choose to consolidate your debt with a home equity or a personal loan, then the resulting monthly fee will often be lower than what you are currently paying each month toward your debt. This will free up cash for you if you need it, or you can continue paying the same amount toward your new loan. Doing this will help pay down the debt faster. The reduced monthly fee can also help you start putting money into an emergency fund. You can use this fund in lieu of credit cards, which can help control your debt.
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Psychological Reasons
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Debt can be overwhelming, and consolidating debt can help ease the emotional burden because you are taking a proactive approach to paying off your debt. There is, of course, the added benefit of having only one bill per month to worry about. The downfall to debt consolidation is that many people ultimately continue spending on their credit cards after consolidating. The best way to avoid this is to confront spending issues and develop a budget to ensure that you will not fall back into bad credit habits.
Debt Consolidation Programs
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There are programs that call themselves debt consolidation programs. These typically turn out to be debt management programs. These programs work with your creditors to get either reduced rates or payments. Then for a fee, they take over your credit card payments while you send in one lump sum to them each month. The drawback to these programs is that your credit report will show that you are in a program and this does not always equate to higher scores. There have also been reports of less than scrupulous companies taking payments and not sending them to the credit card companies.
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