Debt Consolidation: How to Tell If It’ll Work for You

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Financial freedom is almost always everyone’s goal. This is why we strive to set up a business, make way for a higher disposable income, and be financially wise overall. Disposable income refers to the money left after spending on necessities such as bills, groceries, and debts.

But when you have debts—not just one or two—it can significantly trim your disposable income. When it gets worse, which is having a higher debt to income ratio, you’re most likely going to fall astray from your goal toward becoming financially free.

This is one huge reason to grit at paying all your debts once and for all. Say, for example, you consider mortgage refinancing. You can’t jump to having a new set of debts when you haven’t even paid off your existing loan. Fortunately, if you qualify and can benefit, you can play your ace card, which is consolidating all your bills into one.

What Is Debt Consolidation?

Debt consolidation stands to its name—consolidating or paying all your debts into one. If you qualify, in three to five years, you’re going to come out debt-free, and that can be the greatest relief you’ll have your whole life.

It’s easy to track paying your debts when you just have one or two, but it will be difficult if your debts get to more than five. You’ll most likely feel overwhelmed, especially when you don’t have a plan that divides your income for these payments beforehand.

Debt consolidation can spare you this mental math of having to remember different payment amounts and due dates since it puts all your debts into one; hence, simplifying the process.

Another huge benefit from debt consolidation is that it lowers your interest rates as it rolls all your payments into one. This can sound too good to be true, so how does this happen?

When your debts are consolidated, that one payment can spread over a long period, which can even extend for up to seven years. This means you will be paying less in the interests and fees and pay less weekly or monthly.

Lastly, it can improve your credit score. As simple as having a hard credit inquiry can already give your credit score a significant dip. Ideal credit utilization should be lower than 30 percent as much as possible. Paying off your existing credit debts can decrease your utilization rate; hence, increase your credit score.

woman down on debt

How to Know If You Qualify for Debt Consolidation

Not everyone can qualify for debt consolidation. You can only be eligible if your debt obligations every month don’t exceed fifty percent of your monthly gross income. Your cash flow should have also been steadily covering your debts.

You will also need to have a good enough credit score that qualifies you for a debt consolidation loan of low interest or zero credit card. Overall, what you really need is a stable source of income that enables you to pay your monthly payments.

If you think you qualify for these, how do you know if consolidating your debts is the right decision for you? Take note that it works best when you don’t make a new loan. Debt consolidation wouldn’t cover you when the issue is on your spending. Better yet, fix any spending issues first.

Debt consolidation would be a smart move when putting your debts into one bill actually reduces the balance you have to pay every month instead of just barely reaching the required minimum amount.

It’s also a good idea for you when your debts’ interest rates reduce by up to eight percent or less, and your monthly payment becomes affordable enough considering your overall household budget.

When You Should Not Pursue Debt Consolidation

As mentioned, debt consolidation isn’t for everyone, especially for those with spending issues. The way you handle credit cards should be for your needs, not wants.

First off, stop considering debt consolidation when you can’t yet weigh your purchase priorities, such as between your needs and wants. Commitment is a great deal too. Opting to pay through debt consolidation would mean you’ll have to commit to paying every month consistently and on time.

If your debts are not that big, you can just pay them within a year by just saving big; you don’t have to consolidate one small debt with another. Debt consolidation isn’t also a choice for those who are overwhelmed by their debts and have no apparent hope for paying them all, even through reduced payments.

A Huge Commitment but a Key to Financial Freedom

Being qualified for the opportunity doesn’t always mean you go for it. But if you should qualify and you can live up for the commitment, go ahead. Take your monthly payments seriously, and you’ll end up being a financial winner in the end.

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