If you have several credit cards and other forms of debt, you may be struggling to stay on top of all your monthly payments. Consolidating your debt into one convenient place is a great way to save money and reduce stress.
Another benefit of debt consolidation is that it can help you get your finances in shape so your credit score gets a boost. Read on for more details about how debt consolidation can work in your favor.
Lower Monthly Payments
If you use a financial tool like a personal loan to consolidate your debts, the monthly payment might be less than all your other payments combined.
Here’s what to do if you’re weighing up the benefits of debt consolidation:
- Add up all your average monthly payments from your existing credit cards and loans, including any private loans from family and friends.
- Compare that total to what your monthly payment might be for a personal loan.
- Also, consider how much easier it will be to make one payment compared to the number of payments you’re currently making.
Get Out of Debt Faster
Consolidating your credit cards and other debts into a single personal loan means you’ll know exactly when all of your debts will be paid off in full.
By contrast, credit cards are a form of open-ended, revolving credit. As long as you keep running up a balance, you won’t have a definite timeline for when you’ll be debt-free. You may get trapped in a cycle – but debt consolidation can help.
Using a personal loan for debt consolidation means you can choose your term to match your goals:
- If you want to pay your debt off as quickly as possible, choose a shorter term. Your monthly payment will be higher but you’ll likely get a lower annual percentage rate (APR).
- If you want a more affordable monthly payment, choose a longer term. Your single monthly loan payment might be lower than the total of all your current monthly payments for your credit cards and other debts.
Save on Interest
You’ve probably noticed that each of your credit cards and loans comes with a different interest rate – and some of them may be very high. Another benefit of debt consolidation is that you can save money on interest.
Here’s how you might save on interest:
- A debt consolidation personal loan may come with a lower annual percentage rate (APR) than your existing credit cards and other loans.
- You’ll likely pay less total interest over the life of a personal loan compared to the total interest you have to pay on your credit cards each month on an ongoing basis.
Make Your Life Less Stressful
Debt consolidation can bring you peace of mind because it’s much easier to manage your finances when you have a single monthly payment with a lower APR.
In addition, you’ll get to deal with one understanding financial institution – such as your local credit union – instead of dealing with multiple creditors and lenders.
Ways that debt consolidation can reduce your stress:
- You’re less likely to ever miss payments, which means you won’t hurt your credit score or incur late payment fees.
- You’re less likely to have bills being sent to collection, which means you won’t be in danger of having your assets seized.
- If you borrowed money from family members or friends, you’ll be able to settle the debt and avoid putting any strain on the relationship.
Boost Your Credit
A great credit score is key to unlocking low-interest rates and generous loan amounts. Luckily, debt consolidation can help improve your credit in many different ways.
Here’s how consolidating your debt can boost your credit:
- You’re more likely to make your payments on time, which is important when timely payments may account for over 30% of your credit score.
- If you pay off one or more of your credit cards, you can keep that account open with a zero balance and this will give you a great credit utilization rate, or debt-to-credit ratio, which is a key factor in determining your score.
- Keeping your accounts open also means you’ll extend the amount of time you’ve held credit, and this will ultimately give your score another boost.
- Another factor is your mix of debt, so if you’ve only held credit cards in the past, using a personal loan for debt consolidation will add variety to your accounts.
Benefits of Debt Consolidation: Next Steps
There are a few financing options to choose from when considering how to consolidate your debt.
If you’re a homeowner, you might explore a home equity loan or home equity line of credit (HELOC). You could also consider doing a credit card balance transfer, which involves transferring your debt to a credit card with better terms and rates than what you have now.
That said, a personal loan might be the simplest and most convenient option because you can decide your loan amount and how long you have to pay the money back. Debt consolidation should make your life easier and more enjoyable – click below to find out more!