Are you ever confused as to why people do debt consolidation, or even what debt consolidation is? The whole concept of debt consolidation confuses some people, as they ask why would you take on another debt, even if it can pay off the other debts. Some people opt for debt consolidation, taking several debts and paying them off with one lower interest loan. Ever wonder why so many people use personal loans to consolidate their debts? Taking out a personal loan to pay off multiple debts has several advantages, which we will discuss, lets take a look at some of these advantages.
Credit card debt is bad debt, if the balance is to high. When you have very high credit card debt, your credit utilization will climb upwards. You are only supposed to use less than 30 percent of your available credit, such as from lines of credit or credit cards. Any credit use that exceeds 30 percent of your credit limit will cost you points off of your FICO score due to too high of a credit utilization. Once you take out a personal loan to pay off all of this revolving debt, your credit score will start to repair itself in as little as 30 days, provided that you do not run up a new balance, nor close out the credit card. When you close out a credit card, your available credit lowers, which in turn can affect your credit score, so try not to close out a credit card, unless you absolutely have to.
Single Payment Per Month
If you have so many debts going on that it is hard to keep track of, let alone budget for, a personal loan for debt consolidation is just what you need. Say good bye to forgetting to make that credit card payment by the due date, or keeping track of 7 credit cards balances. With just one simple balance and one payment per month you can breath a little easier, and budgeting for that one single payment will make life simple again. A personal debt consolidation loan makes finances easier to manage, thanks to having one single monthly payment.
Smaller Monthly Payments
When you fall behind on your credit card payments, the interest will continue to build up, and the next month you will be paying interest on the last months interest. This cycle continues, until the debt load becomes unsustainable. The monthly payment amounts just continue to rise. This is especially true if all you can manage to do at the time is to pay off just the monthly minimums on your credit cards. When you make use of a personal loan to pay off all these balances, you end up with just one structured payment per month, with a fixed interest rate. Most times this monthly payment will be smaller then adding up all of the original payments and then factoring in the interest and additional debt you avoided by opting to consolidate your debts.
Lower Interest Rates
A personal loan will often offer you a lower interest rate overall. Remember with credit cards, it is the current balance you pay interest on, and every month that this balance is allowed to go up, results in more interest overall. Often times a personal loans APR and monthly payment will be lower than the sum of all your credit card payments per month. Many personal loan lenders will allow you to check your rate before you apply, without harming your credit score, which will allow you to easily see if a personal loan will be the right answer for your credit card debt problems.