Debt Consolidation and why it should be your last resort
According to Direct Axis, debt consolidation is when you reduce your credit accounts into one single monthly payment at a fixed interest rate, freeing up cash. A Consolidation Loan is designed to simplify your finances, so instead of having several lending and credit accounts to manage, you’ll have just one.
That sounds great, but what is actually happening behind the scenes to your credit score when you choose to consolidate debt?
In the short term, consolidating debt shows banks that you have reached a point of no control with your credit. That you have too much credit to repay and not enough money to do it. Or perhaps you have lost track of all your accounts and you have missed a few payments which also shows a lack of discipline and responsibility towards your finances. This negatively affects your credit score in the immediate future.
However, in the long term, you will be improving your credit score by sticking to one installment a month. You can regain that trust from the banks, which will allow you to get further financial assistance in the future for a home loan or vehicle finance. The trick here though is that you must stay consistent in paying the installment in full every month, maybe even paying a little extra, and on time. You cannot take up more credit during this time, and do not even think about reviving those old accounts that got you to this point of debt consolidation in the first place. Otherwise the plan of fixing your credit score will not even have a chance of working.
Debt Consolidation as a form of debt management, really should be your last option. If you are managing quite fine paying off your credit, then stick to that. You will finish quicker and boost your credit score faster. Unfortunately, if you see that somehow somehow you have reached a point of complete desperation, then choose this option. Yes, it will take you longer to pay off all the credit you used, but if it truly is your only option, then it will make life much easier because you will be making only one, smaller payment a month. All you have to do is visit your nearest bank or give them a call and they will assist you immediately.
To learn more on Debt Management, you can sign up for the Financial Bunny School learning course, by following this link: [insert teachable link of debt management course]
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