There soon comes a day of credit judgment for those who have borrowed excessively for years. Unable to keep up with their minimum credit card payments, troubled borrowers seek out a solution. Debt consolidation is proclaimed a reliable way of dealing with debt woes. Is debt consolidation really helpful? It most definitely is.
The Fiscal Hassles of Carrying Heavy Debt Loads
Carrying high balances on several credit cards creates a number of precarious problems. For one, a borrower’s debt-to-credit ratio ends up rising very high. The debt-to-credit ratio, also known as a balance-to-limit ratio, refers to how much money is borrowed on the cards vs. how much money is available to borrow. When several cards combined yield $50,000 in credit and $45,000 reflect the outstanding amount due, the debt ratio reaches 90%. A figure of only 30% would be devastating to a credit score.
Another problem arises when outstanding debt rises too high. Paying down the debt on high-interest credit cards is difficult enough. When the amount of the debt is enormous, paying off the debt becomes a near-impossible dream. The fiscal punishment derived here is found in all the money that goes towards principle as opposed to interest.
With these things in mind, it may be very wise to look towards acquiring a debt consolidation loan.
One Loan Means Simplicity
A debt consolidation loan is, in essence, a form of refinancing. $17,000 in debt spread across several different credit cards could be absorbed into the umbrella of a single loan. The principle of the debt remains. A debt consolidation loan is not a magic solution that makes debt disappear. The loan does make paying off the debt a lot easier and far less expensive.
Acquiring lower interest rates is the main purpose so many seek a debt consolidation loan. What would be the purpose of shifting the debt to another loan with the same excessive interest? Lowering the interest rate makes the repayment of debt cheaper.
Paying off the loan becomes faster since more money is directed towards the principle and less towards the interest. Minimum monthly payments are going to be less since there is only one monthly payment and not several spread across several cards. Of course, the money now freed up by the elimination of several credit card balances can be directed towards the single debt consolidation loan. Doing so further speeds up the payoff.
Types of Lower Interest Options
A few options exist for those hoping to consolidate credit card debt. Transferring the debt to a 0% APR credit card is a possibility if the amount of debt is low. $9,000 spread across three cards, for example, could be moved to a card with “no interest for the first year”. Debt that is significant — well over $10,000 — could be consolidated onto a personal loan. Moving the debt to the balance of a line of credit affixed to a checking account is another option.
Those with bad credit, however, may find unsecured loan approvals to be elusive. Secured collateral loans might be available. A very low-interest home equity loan might be the easiest to procure.
Credit Score Improvements
The minute debt is consolidated and the process to paying off the debt is launched, steps are being taken to finally improve a devastated credit score. The results are not going to occur the second debt is transferred to a new loan. A bit of time has to go by — and a bit of the debt balance has to drop — in order for a credit score to improve.
Other issues play into the lowering of a credit score. Personal loans may be more helpful than low APR or line of credit consolidations. Credit cards and lines are known as revolving debt. That means available credit is always there. With a personal loan, the debt is fixed and designed solely to be paid off. Hence, personal loan debt won’t be as impacting on a credit score.
A New Fiscal Path
Consolidating debt is not the main solution to the issue of high debt. Debt consolidation is a means to achieving a desired goal. Anyone hoping to get out of debt has to stop borrowing. Adding back to the debt is only going to lead to a return to financial trouble.