The Good and the BAD of Unsecured Debt Consolidation
Published by admin on May 29, 2010
The Good and the BAD of Unsecured Debt Consolidation
Unsecured debt consolidation lowers your rates, helping you to pay your debt faster with just a single payment. You can also reduce your monthly payments. But consolidating your short term loans can temporarily lower your credit score. You may also be tempted to spend the money you will have after doing this, which can turn your current situation into a disastrous one.
Lower interest rates and payments
Consolidation loans and debt management plans (DMP) can both lower your rates. Home equity or personal loans are going to offer lower rates than the ones that you get from your credit cards and these can be used to pay off the outstanding bills. A DMP company is going to negotiate lower rates with your creditors.
With reduced rates, your minimum monthly payment will also be lower. Although it is tempting to pay the minimum, continue to pay as much as you can, so you will quickly lower your debt. If you do need to lower your payments, you might consider extending your loan terms.
Easier to handle
Consolidating your bills will help you pay back your debt easier and you will also find it easier to manage. Instead of multiple accounts to manage, you have only one. DMP only require a monthly payment to the managing company, they handle paying your accounts.
Temporarily Lowers Credit Score Rating
A loan or DMP will lower your credit score temporarily. By opening a loan account, your credit rating is going to be lowered depending on the credit activity and the amount borrowed. To compensate for this part by closing accounts you pay off.
DMP will lower your rating if your creditors send notices to the Credit Reporting Agencies. Not all creditors report arrangements with DMP companies. If they do, on the short term you may be able to open new accounts. After a year with regular payments and a significant reduction of debt, you are going to qualify for most lenders.
Tempting to use open credit card
When you pay off your accounts you are going to be tempted to rack up credit card debt again. This can put you in a worse financial situation. To avoid this problem, close the accounts that you do not need. Take credit cards out of your wallet and leave them in a safe place to be used only for emergencies.
Before signing a contract to consolidate your debts, consider several companies rates and terms to find the best deals. Online websites can you find this information easily.
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