Why is debt consolidation so important for you?

It is important that you know about debt consolidation. What it is, how it works, and why you can use it some time or the other, for your own personal finances.

I have always been confused, why consolidating debts is considered to be one of the finest and artistic money management procedures. Debt consolidation is something that you look up to when your debts can in no way be paid off as per the payment agreements.

Many creditors even encourage consumers to take time and consolidate their debt accounts.

Why?? What is it in this debt consolidation that draws so much attention?

What is it that gives consolidation a precious position in the debt and finance industry?

This post is made, especially, keeping credit card debt in the head. We will try to exhibit our discussion centering credit cards, with occasional touches on other types of debts too.

It is requested that you keep reading even if your searches are related to payday loans, personal loans, or other secured debts.

A credit card is viewed as the most potent form of debt, that today’s US consumers hold! Hence, this post will be giving suggestions, speculating any random reader as a victim of credit card debt.

However, debt consolidation behaves quite the same for all types of debts. In simple words, it is nothing but trying to have one/consolidated payment for all your debts!

So, what makes it important for you to know about debt consolidation?

You must have come across many debt-relief options that people use to manage their debts. We have debt settlement, bankruptcy, loan modification, and so on.

But debt consolidation is different than all of them. Here you will be paying off your debt amounts in full! Only your interest rates may or may not get adjusted! Rest, everything remains the same.

You pay off your debts, get a good status reported to the credit bureaus, and see your credit score increase.

This is one of a kind debt relief option that affects your credit score in a very interesting way.

The effects that debt consolidation has on your credit score:

Suppose you have 3 credit card debts. For an easy example, let’s consider that each has a limit of $1000, and on each, you are carrying balances of $500, $400, and $100, respectively.

There’s a factor called a credit utilization ratio, which makes up a significant portion of your overall credit score.

This ratio is also called the debt to credit ratio and is calculated like this:

[(Total debt / Total available credit) *100%] = Utilization ratio (or the utilization percentage).

If you can keep this percentage well below 35%, then your credit score is bound to be in good standing.

Now, in our example, we have our total available credit as $1000 * 3 (for the three credit card limits), which equals $3000.

Our total debt for the 3 cards is $500+$400+$100 = $1000. So, our utilization percentage or ratio will be (1000 / 3000) *100% = 33.33%.

Now let’s say you want to go for a consolidated payment for all of your credit cards. The most common type of consolidation that people use for credit cards, is credit card balance transfer.

In balance transfer, you take out another card and transfer all your existing credit card debts to this new card. In this example, we need a card that has at least a $1000 credit limit.

Assuming, we take out a $1000 limit card, our new utilization ratio will be: {$1000 (total debt) / $4000 (3 existing credit cards’ limit + the new card limit)}.

Keep in mind that the balances on the existing cards become zero, once the transfer is done!

This gives us 25% as our new ratio. It is obviously better than 33.33%.

Pay attention!!

There’s a crash period for debt consolidation. The time gap between, after a new card or loan is taken out, and before the existing debts are paid, is highly dangerous!
In the above example, for instance, the ratio at this time will be [($500+$400+$100+$1000)/$4000] *100% = 50%.
This is really bad for your credit score!
Hence, pay off your existing debts right after you take out a new debt for consolidation!

So instead of hurting your credit score, debt consolidation actually improves the score with time!

The variety of options that debt consolidation offers:

Ah! There you are! Debt consolidation has different approaches to different debts! It’s a broad term that asks for one payment for several debts! Only one payment, which will get proportionately divided among all the debts.

For credit cards, you have Balance Transfer – a nice way to manage debts, or you can take help from a consolidation company.

To pay off other generally unsecured loans/debts, you have the option of taking out a consolidation loan (a type of personal loan), or again approaching a consolidation company for pro-help!

But, here I tell you one thing! Debt consolidation is exclusively designed for unsecured debts! For mortgages or car loans, there is no role in consolidation, in its true sense.

However, at times, if you have multiple secured debts, from the same bank, then asking the bank to arrange a single median payment might also function as a type of debt consolidation!

But that’s a different story and we aim to touch on it soon. Stay tuned to the Credit Card Consolidation Debt blog for more talks on these interesting topics.

The ethical payment plan that professional debt consolidation offers:

If you are doing debt consolidation on your own, then you will be missing out on this part.

A professional debt consolidation, done with a consolidation company, gives you a payment plan and a budget, that will help you to pay off your debts in an organized manner.

The payment plan and the budget will tell you how to save on expenses, and how to save your debt payments each month. This payment plan has helped many debtors in the past, by forcing them to change their spending habits permanently, for good!

That’s why debt consolidation is given a special place among all debt relief options. When debt settlement or bankruptcy focuses on bringing your head down and surrendering, consolidation asks you to stand up and pay off your debts in full.

Debt consolidation is respectful!
It is, but very important, that you start to understand it!