If you’re looking for a way to help your budget, debt consolidation is worth considering. With this strategy, you roll multiple debts into a single payment, usually through a personal loan or credit card. Let’s take a closer look at what debt consolidation can do for your budget and overall finances.
Turn multiple payments into a single payment
It can be overwhelming to pay down different debts with multiple due dates. Debt consolidation simplifies the process. Once you consolidate your debt, you’ll only have one payment to keep track of and budget for. For some people, this can feel like a weight has been lifted off their shoulders.
Lock in a lower interest rate
Are your debts from time in your life when you had a poor track record with credit? If you’ve improved your credit history since then, you may be able to secure a lower interest rate when you consolidate your debt through a loan or credit card balance transfer, which can save on the lifetime cost of your debt.
Improve your credit score
Another benefit of debt consolidation has to do with your credit score. If your credit utilization ratio is high due to maxed-out credit cards or lines of credit near their limit, a consolidation loan can reduce your credit utilization ratio or how much of your available credit you’re using. You may also see an increase in your credit score. Improved credit can open the doors to lower interest rates and more favorable terms in the future. Of course, a temporary boost in your credit score is just a start. Follow through with consistent on-time payments over the long term to make a significant change.
There’s no denying that debt can cause stress and anxiety. Through debt consolidation, you can take control of your finances and allow yourself to stay on top of a single monthly debt payment, instead of multiple. You’ll improve your finances and mental health at the same time.
Become debt free faster
If you’re able to land a lower interest rate, consolidating your debt may allow you to pay off your debt sooner than you ever thought possible. Once you get out of debt, you’ll be able to put your hard-earned money toward other financial goals like saving for a house or retiring.
When is debt consolidation a smart choice
There are a number of situations in which it makes sense to consolidate your debt. You’re more likely to succeed with this strategy if your monthly debt payments (including your rent or mortgage) don’t exceed 50% of your monthly gross income.
Also, if your credit qualifies you for a low-interest debt consolidation loan or credit card balance transfer and your cash flow continuously covers your debt payments, you may want to take the debt consolidation route. Be aware that origination fees are also a part of your lifetime cost when comparing your options. Additionally, extending your repayment term to lower your monthly payment can actually increase your total cost compared to your original debts.
Debt consolidation is a great option if you’re ready to streamline the debt payoff process and improve your budget. It can be the difference between getting out of debt quickly or staying in debt for a while.