Credit Consolidation and How It Works
One of the more sought after forms of debt relief, consolidation can help you in a pinch. Being able to attain a loan to pay off multiple creditors can organize your debt instantly. While it doesn’t reduce or eliminate your debt, it can make it much easier to manage. Credit consolidation works in the same way. Most Americans carry multiple credit cards or credit accounts and can find benefits in credit consolidation. Here we will discuss the pros and cons of credit consolidation so you know whether it can help you.
Credit Consolidation Positives
The main benefit from credit consolidation comes in the way it organizes your debt. Holding multiple credit cards can result in a disorganized payment schedule. With multiple payment deadlines and interest rates, it can be hard to keep track of it all. Consolidating your credit helps in funneling your debts into one lump sum. In some instances, the minimum payments and interest rates mimic those of your credit cards. This can create potential saving overall should you happen to miss a consolidated payment as opposed to multiple missed payments.
Credit consolidation also has the added benefit of being able to instantly drop your credit balances to zero. While your overall debt will remain the same, individual lender debt will be eliminated (except for the consolidation loan). This can help your credit rating in two ways: by clearing up multiple debts at once and by adding an extra form of credit. Both of these outcomes stand to boost your credit rating, and with constant payments your score can elevate even more.
Credit Consolidation Negatives
Unlike other forms of debt relief, credit consolidation doesn’t lessen or remove debt. Instead, it merely displaces it, moving it from one place to another. You will still be responsible for the entire amount of your debt you owe. If you were unable to pay your debts before, consolidation rarely makes it easier to do so. Oftentimes, due to the size of the resulting debt, your minimum payment might not be as small as you’d like.
Another problem that can arise with credit consolidation is your credit usage. Unlike debt settlement or credit counseling, there is no guideline given on how to alter your financial behavior for the better. If you use a consolidation loan and continue to accrue debt, you’ll end up in much more debt than when you started. Should you miss payments on your consolidation loan, the interest rate (even if it’s low) can result in massive extra fees. To avoid these outcomes, make sure you keep your credit use to a minimum and make your credit consolidation payments on time.