Credit consolidation is one of the most important tools a borrower has in reducing the difficulties of his or her financial obligations. To make a long story short, credit or debt consolidation is the process by which you pay off all your debts using a special loan or balance transfer, thus "consolidating" all your loans into one larger loan. It's as simple as that.
Why It's Important
Whenever we talk about debt, many people assume that it is a given amount of money that one owes to a particular bank or lender. Unfortunately, that's not true. Most people who owe money, usually owe it to multiple lenders and financiers. Since this is the case, multiple debts ultimately lead to multiple interest rates, thus increasing your financial obligations and draining more of your income.
Moreover, because you are facing several debts, you also need to remember that your credit score will be exposed to even further risks and problems. So given such problems, consolidating all your debts will not only help you pay off your obligations, it will also help you protect your credit score.
How to Pick a Credit Consolidation Plan
In order for credit card debt consolidation to be practical, the consolidation loan that you will need to get has to have a lower interest rate. It also needs to have a lower repayment time than all your other loans. To do this, you will need to calculate the average interest rate of all your loans and compare that to the interest rate on your own consolidation loan.
Moreover, you should decide whether you want a long term, total repayment method or a short monthly repayment plan. Although the latter is generally more expensive, what you also have to remember is that if you decide to make your payments over a long period of time, you may end up paying more interest than you might expect.
Requirements for Getting a Credit Consolidation Plan
In order to get a credit or debt consolidation plan, you will need to have a relatively high credit score. The problem however, is that most people who need these plans are the ones who also have bad credit ratings. Despite this though, you can still get a debt consolidation plan even if you have a bad credit score. The only problem is that you may not qualify for the best interest rates for your consolidation loan.
Aside from your credit score, a debt consolidation program may also have other requirements, particularly if you have a total debt that exceeds $20,000. If this is the case then your lender will ask for some assets as collateral, like your house or your car.
Credit Consolidation is Not Debt Management
It's important to remember that credit or debt consolidation is not the same as debt management. The latter only makes regular payments to your creditors, while the former involves paying them off completely in one go. As such, you need to remember that debt consolidation is a very specific term, and should not be confused with the other methods used to pay off debt.