Credit Consolidation: How to Consolidate Your Debts

Credit Consolidation: How to Consolidate Your Debts

Credit Consolidation or Debt Consolidation is a policy that you can adapt to and that would allow you to manage your debts in a more efficient way. Consolidating debts mean you take out new loans in order to pay off the older ones. Your debts can include a number of liabilities and other unsecured consumer debts that need to be paid off right away.

Through Debt Consolidation, you can combine multiple debts into a single debt that you can then pay with favorable payoff terms. It also buys you extra time to pay it off. The amount you need to pay, usually have a lower interest rate, with or without a lower monthly payment.

Most consumers that opt for Credit Consolidation happen to be students who want to pay off their student loans, credit card debts, and other loans. They use this policy as a tool to deal with multiple loans that they ended up taking when they required it.

Types of Credit Consolidation Loans

There are mainly two broad types of credit consolidation loans: Secured and Unsecured.

  • Secured Loans are usually loans taken with collateral as a security backup that includes assets of the borrower such as houses, cars and other legal properties. Since they have these assets as a security backup the chances of repayment are high because of which the creditors charge lower rates of interest.
  • Unsecured loans are not backed up with security assets hence these loans can be more difficult to be granted. Even the rates of interest for these loans are higher than the secured loans and have lower qualifying amounts.

For either type of loan, the rates of interest are comparatively lower than the interest rates charged on credit cards.

Ways to Consolidate your Debt

There are many ways to consolidate your several debts and lump them up into a single loan. The most common method of credit consolidation is by getting a new credit card and consolidating all the credit card payments into a single one. But it is only a good idea if the credit card charges small rates of interest even for a short period of time. 

There is actually even another way to do this by utilizing an existing credit card and make use of the balance transfer feature if it is available. Especially if it offers some special promotion on the transaction.

You can also opt for HELOC or Home Equity Lines of Credit as another valid option for credit consolidation. In most cases, the interest charged for HELOC is deductible for people paying taxes who itemize their deduction amounts.

When should you go for Credit Consolidation Loans?

Credit Consolidation Loans are exceptionally beneficial for people who have multiple debts over their heads. So you should opt for these loans only if you are having difficulty in making payments or have accounts with high interest rates or monthly payments.

Once you have your loan granted, a debt consolidation plan usually stops the collection agencies from repeatedly calling you. Because you will be able to pay off the loans they have been calling for.

So you should only go for Credit Consolidation Loans if you really are willing to commit to managing your expenses wisely and cutting down your monthly budget.

When should you NOT go for Credit Consolidation Loans?

Credit Consolidation Loans should not be opted by people who are not planning to change or cut down on their spending habits. Using credit cards for whatever you want whenever you want them usually grows into a bad habit for most people. But you should keep it under check when you are drowning in too much debt because there is no end to relying on and running your expenses on credit.

It is not a good option for you when :

  • You are not willing to make a serious monthly budget and commit to it.
  • It does not feel sure if the fees and costs related to the consolidation loan will end up costing you more money than your present payment method and how much repayment period you can allow yourself to take.
  • You are not aware of the fact that a credit management program requires a consistent, timely monthly payment in order to retain the advantages of the loan program.

By now, it is clear from the above facts that Credit Consolidation is for you if you commit to paying off your debts. But if you are one of those types who mostly have random payment ways and do not have fixed sources of income then avoid taking a credit consolidation loan as it requires a constant, systematic way of repayment.