Sometimes, debt consolidation gets a bad reputation because it doesn’t keep you out of debt. It only rearranges it so that you can better afford to pay down your debt. However, as the experts at York Credit Services explain, there are significant benefits of debt consolidation that make it a feasible option for many borrowers. Of course, it’s one of several options to consider, but for you, debt consolidation might make sense.
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Debt consolidation simplifies the repayment process by giving you a single payment on your debt instead of multiple payments to multiple creditors. This is one of the top benefits of debt consolidation because you’ll usually pay less overall with a single payment than you are currently paying with multiple payments. This can free up money every month for you because you’re still paying down your total debt, but doing it with a single payment.
When you have multiple payments to make every month, it’s easy to forget one, which can damage your credit rating and result in additional charges. Simplifying the payment process to just a single payment every month will ensure you don’t miss it. In many cases, you can even have your single payment automatically withdrawn every month, which eliminates the possibility of missing it.
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Lower Interest Rates
One reason why debt consolidation often leads to a lower single payment than all your multiple payments combined is that the debt consolidation loan usually has a lower interest rate than your other debt. Credit cards in particular have extremely high interest rates, so you’re paying significantly more for your debt when you pay the credit card companies than you will if you pay a debt consolidation lender.
If you have several high-interest debts, including credit cards, a debt consolidation loan is often an excellent choice to lower the amount you will ultimately pay in the long run. Compound interest is deadly to debtors, so the lower interest rate you have, the better off you’ll be both in the moment and in the future.
Improved Credit Score
Even though you’ll still have the same amount of debt after a debt consolidation loan as you do before, you’ll see a boost in your credit score when you take out a debt consolidation loan. This is because your credit report will show that you have paid off those other debts, which is always good for your credit score. Of course, your debt utilization percentage will remain the same, but with consistent payments to your debt consolidation loan over time, that percentage will decrease and your credit rating will increase.
Keep in mind that debt consolidation does not prevent you from taking out more debt, so don’t start charging purchases to your now-clear credit cards as soon as you get your loan. Many credit card companies will reduce your credit card limit as soon as they see you’ve consolidated your debt anyway, but just in case, this is not the time to dig yourself further in debt.
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While a debt consolidation approach toward getting out of debt isn’t right for everyone, it is often a great solution for many. Before you take out a debt consolidation loan, though, talk to a credit counselor to make sure it’s a good choice.