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Are you more and more in debt?
If so, you are not alone. The pandemic has created a need to repay debt like we have never seen before. You should compare credit card refinancing to debt consolidation services. You should consider all types of credit card relief.
If you are trying to study the pros and cons of debt consolidation, you are not alone. In fact, you are in good company as consumer debt is now well over $ 14 trillion. It’s probably safe to say that countless consumers are looking for debt relief options besides you. There is therefore no need to be discouraged.
Here are the pros and cons of debt consolidation that you should consider.
Pros and Cons of Debt Consolidation – The Good News
Easier debt management
Easier debt management is a possible benefit with debt consolidation. Since debt consolidation works by taking out a loan that combines all of your loans into one sum, paying off can be less stressful. You only need to pay one amount instead of multiple payments each month.
If you have a good deal, then you can take advantage of a lower average interest rate for all of your debts combined. Your chances of getting a lower interest rate depend on your debt consolidation company’s negotiating skills, your credit score, and your creditors’ willingness to cooperate.
The possibility of a lower interest rate emerges as one of the main advantages and disadvantages of debt consolidation. Of course, you may not necessarily be able to benefit from a lower interest rate. But more on that later.
Better use of credit cards
Credit card refinancing is a key factor in your credit score. With debt consolidation, you can reduce your credit card balances and thus improve your credit utilization rate. As you continue to pay off your debts, your card balances will decrease and therefore the credit utilization rate will also decrease. Your credit score will increase accordingly.
Thus, you could increase your credit score if you strictly follow the payment schedule of your debt consolidation plan. This is another of the main pros and cons of debt consolidation to know about.
Pros and Cons of Debt Consolidation – The Bad News
You still need to change your financial habits
A debt consolidation loan is not a magic elixir for your financial woes. It won’t change your financial habits – the very factors that led to high debt in the first place.
In order for debt consolidation to work, you will need to make some serious changes in your financial habits. Instill good habits like spending less and saving more. Make sure you read plenty about good financial habits to boost motivation and find out how it’s done.
You may need to turn to a debt counseling agency to help you with your financial habits. They can contact you and advise you on adopting sound financial habits. They will probably have helped many others before you and could benefit you if you cooperate.
The financial knowledge you gain in this way could help you get out of your current situation. You will of course have to pay extra for the counseling service.
As explained above, a good debt counseling agency can help you develop better financial habits. But even with such a program in place, you should still do your own research to find other ways to boost your financial situation.
Could harm your credit score
If you are successful in negotiating better terms with your creditors, they will most likely report it to the credit bureaus. It will go on your credit report.
If you miss your payments, it will impact your credit score. But if you pay rigorously on schedule, it will ultimately improve your credit score.
Fees and scams
You have to watch out for hidden fees and charges. Make sure you read the entire deal to make sure you’re getting a good deal. Find out about anything that is not clear. Read the fine print and make sure you know everything about the deal.
To reduce your costs, it is advisable to opt for non-profit debt consolidation companies. You should also do your research to find out the quality of their service, their customer satisfaction and their success rate.
And beware of debt consolidation scams. As with all other legitimate businesses, there are debt consolidation scams. Some of these scams can be subtle and not so obvious. But they can still end up hurting you if you miss them. Beware of old stuff like the fine print, nebulous contract language, and vague terms that seem ambiguous. To mitigate the risk of scams, avoid commercial services. Also, nonprofits often charge lower fees.
Waste of time
Hurry up. When you register with a debt consolidation company, they may ask you to stop paying creditors until negotiations are complete. But these negotiations can go on for weeks without any resolution or results. Creditors are not obligated to cooperate with debt consolidation. In fact, it might be their policy to avoid any interaction with such companies. This is a major drawback among the pros and cons of debt consolidation that deserves attention.
If the negotiation phase doesn’t work, you can end up suffering big damage to your credit score, accumulating interest, and a greater possibility of lawsuits by creditors – all for nothing.
Failure to get a lower interest rate
The main benefit of debt consolidation is to reduce the interest rate. Besides your luck, a lot of it depends on your credit score, the tactics of your debt consolidation business, and the willingness of your creditors to provide leeway.
Without a lower interest rate, debt consolidation is largely futile. This is another major pitfall to think about when thinking about the pros and cons of debt consolidation.
To fully understand the pros and cons of debt consolidation based on your particular situation, it is best to seek advice from a financial advisor.