Buying a new car, home appliances, or moving house can rapidly see your debt increasing. If you’ve been putting purchases onto credit cards, high-interest rates can mean repayments start mounting up, and before you know it, you’re struggling to stay on top of your debt.
Thankfully, there are a couple of options that can help you to get back on track with your finances. One of the most popular ways to reduce your debt quickly is debt consolidation. So, what is debt consolidation and what should you know when considering this option?
Let’s find out.
What is Debt Consolidation?
Debt consolidation is a method of rolling all of your debts into one repayment. This is usually done with a loan or credit card. By combining multiple debts and repayments into one monthly repayment, you know exactly how much you need to pay, and when. This makes the process much simpler, and you only have one creditor to pay back rather than several different ones. You can find out more about the process here.
Debt Consolidation: 3 Things You Should Know
If you’re thinking that debt consolidation may be the way forward for you and your finances, here are 3 things that you should know.
1. You’ll Receive A Better Interest Rate
The majority of credit card debt comes with a high-interest rate. By consolidating your high-interest payments into one debt, you’ll be making repayments with a lower interest rate in the long run. However, this does depend on your overall credit score.
Those with a good credit score can expect lower interest rates than those with a poor credit history. The best way to determine if you’re going to get the best interest rate is to look at what rate you currently have compared with the rate you can get on a debt consolidation plan.
2. You’ll Feel Less Stressed
Paying several creditors at once can be extremely stressful, especially when you have to manage your outgoings alongside other monthly bills, such as food, accommodation, and energy bills. Consolidating your debt into one easy repayment gives you clarity on your finances. Instead of trying to manage several payments, you only need to concentrate on one. This will vastly improve your stress levels as you know your financial position is improving.
3. It Can Boost Your Credit Score
Consolidating your debt can improve your credit score. This is due to the fact that you’re reducing your credit utilization rate. This is the total amount you owe at this moment in time divided by your credit limit. Credit utilization rate is a significant factor in calculating your credit score. However, it’s important to know that while your credit score may drop when you initially take out new credit, after a while, it will improve. Plus, with debt consolidation, you’ll also be saving money by lowering your interest rates.
Debt consolidation can be very beneficial if you have a lot of debt to repay. You’ll be able to pay your debt off faster and have peace of mind that your financial situation is on the right track. Just make sure to assess your individual situation first to determine if it’s the right step for you.