Sunday, January 13, 2013

Things to Consider Before Consolidating your Debts

Debt consolidation is a good idea but only if you are qualified for it. Just like any other debt relief program, you need to meet certain qualifications.

One of the things that you need to look into is your finances. Debt consolidation does nothing to reduce your outstanding balance. It can help reduce your monthly payments through a lower interest rate and the waiving off of some fees. Other than that, you need to be able to afford your current payment. Because of that, a steady source of income is a must.

A budget plan can help you with this. List your income and expenses. Deduct your expenses from the income to know your disposable fund. This amount will tell you how much you can afford to pay every month. If it is more than your monthly debt obligation, then debt consolidation is just right for you. But if it is lower, you need to consider other alternatives like debt settlement - or bankruptcy if your disposable fund is significantly lower than your required monthly payments.

In consolidating your debt, you need to look at the average interest rate on your current debts too. Your target is to consolidate in an account that has a lower rate than what you currently have. If not, then this will not help you at all.

If you plan to consolidate through a loan, you need to check out your credit score. A high credit score will lead to a low interest rate on your new loan. But if you have a low score, you may be given a high rate - unless you have a collateral to put up to secure the loan.

Another debt information to check out is the time that you have left to pay off your debts. A usual debt consolidation program will take 5 years. Check if it is beneficial for you to stick to your current payments or you’d rather lengthen your term for a lower monthly payment.

The last thing that you need to consider is your ability to stick to this plan. One of the pitfalls in debt consolidation is you get the illusion that you have less debt than the usual. For instance, when you pay off your credit cards through a debt consolidation loan, your cards will have a zero balance. That provides the temptation to spend.

You need to be able to control and correct your spending habits in order to fully get out of debt. The scenario we mentioned puts you in danger of acquiring more debts. Make sure you learn your lesson so that you stay out of debt for a longer time.

If you wish to know more about debt consolidation, visit National Debt Relief. It pays to know your options before you dive into a debt relief program.

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