You’ve realized that you might be in over your head, have heard about debt consolidation, and want to know how and why debt consolidation loans help with debt.
(1) Debt consolidation loans help with debt because they do not damage your credit score.
Debt consolidation loans shouldn’t be confused with debt management. Companies like AmeriDebt and Consumer Credit Counseling Service are debt management companies that will offer to help you with your debt. They act as an intermediary between you and your creditors by negotiating deals with your creditors for smaller payments and lower interest rates on what you owe. You send your monthly payment to the debt management company, and they distribute it evenly among your creditors.
Although this might seem like an appealing solution to your debt problems, it will hurt you in the long term. Your credit score will be immediately damaged and the damage will last for years. In the future, when you apply for a credit card or a loan (whether personal, auto, or home), you will be treated the same as a person who has filed for Chapter 13 bankruptcy.
A debt consolidation loan, on the other hand, is a single, large loan that you use to pay off your numerous, smaller loans. You “consolidate” your debts into one. While this will not improve your credit score because you still owe the same amount, it also will not damage your credit score.
(2) Debt consolidation loans help with debt by making it easier for you to remember to make your payments.
If you have ten outstanding debts that you need to make payments on each month, you stand the risk of forgetting one unless you are able to set up automotive payments for all ten. The longer you forget to pay a debt, the more the interest you owe accumulates and the larger your debt grows. By using a debt consolidation loan, you change your ten monthly payments into one monthly payment. You no longer have to worry about forgetting a small debt somewhere.
(3) Debt consolidation loans help with your debt by assisting you in making your payments.
When you take out a debt consolidation loan, you are sometimes able to get a minimum monthly payment that is lower than the combined payments you are making on your smaller debts. This means that in months where money is tight, you can make the minimum payment, and in normal months, you can pay as much as possible to reduce your debt.
(4) Debt consolidation loans help with your debt by lowering your interest rates.
Many credit cards have interest rates as high as 19 to 25 percent. If you can get a debt consolidation loan for 8 percent, you’ll be saving a minimum of 11 percent interest. Although interest rates vary depending on what your debts are, find the average interest rates of your debts and try to get a debt consolidation loan with a lower interest rate than your average.
Successful financial planning: Your mindset is the first step
Basically, financial planning is very useful for all of us. More importantly, for a husband and wife starting a family, it starts off with a list of the things you want and need. Then another list of the expenses you wish to cut back on. Everything is great! Now you sit back and think you have the edge, the secret to your future, and then you get your credit card bill.
Financial planning is not really planning at all. It’s about mindset. Your total monthly income is the leading indicator. This is where your mindset evolves from. Your mindset should be consistent to your income. What am I talking about? You can’t go to a champagne party with beer money! You must mentally prepare yourself into realizing that the nice new car and big house is just not feasible. Dining out every Saturday night and weekly shopping is just not practical. This is where it begins.
Being thrifty is being smart. There are many ways to catch a fish, and many ways to acquire the things you want and need. It’s the mindset that is the first step to successful financial planning. Be practical, be patient and things will come. If you are single or a couple, mindset allows the control of your bills and expenses from the onset. This is where real financial planning starts. Now you can put together a plan that will really work, and become your guideline to achieving a successful outcome. With all that stress taken away, now you can work on improving your monthly income. That’s a plan!