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Sunday, May 1, 2011

In Bad Credit? How Debt Consolidation Can Help

Debt consolidation is often recommended for those in over their head in terms of monthly payments and debt. Monthly budgets are often strained trying to make multiple small payments to several creditors. This can often lead to bad credit if the combined monthly payments are higher than what consumers can afford. However, late payments are not the only damage heavy debt can do to credit. Continuously carrying a balance at or near credit limits on loans and credit cards also causes a drop in credit scores. Naturally, high debt to income ratios also works to bring down credit scores.
By consolidating loans, credit cards, and other debts, consumers can lower their monthly payments considerably. For example, higher education and the debt of student loans are a common reason for debt consolidation. Student loans are issued periodically throughout a student's educational career. Loans are created separately at each disbursement, semester, or school year, leaving students with several student loans upon graduation. Likewise, using multiple sources for funding creates additional loans. If a student graduates with a total of 10 student loans at $50 per month, the total monthly payment on all loans can exceed $500. Consolidating these loans into one loan can reduce monthly payments to a more manageable, $200-300 or less.
High credit card and other unsecured debt can likewise create excessively high monthly payments when paid individually. However, using debt consolidation loans can combine all of these debts into a single loan, often secured by a home or other security, thus lowering both payments and interest rates. Not only does this provide consumers with more breathing room in their monthly budget, but also resolves issues with carrying large balances and negative credit score impact of maxed out credit accounts. However, there are issues to address in this regard.
Many consumers take all of the right steps during debt consolidation to improve their bad credit. They consolidate and combine debt, free up monthly income, reduce or eliminate credit card balances, and show properly paid off accounts on their credit reports. Unfortunately, this is when many consumers make mistakes. With more disposable income and available credit card balances, they once again spend themselves into increased debt. Just because you paid off your credit card balance with a consolidation loan does not mean you should run out and charge it up again. Likewise, extra disposable income freed up by consolidation should be saved rather than spent to prevent further bad credit problems.

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