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If you’re like most Americans, chances are you don’t think much of your credit card debt. What you may not realize, though, is that your credit cards are racking up interest every month you fail to pay off the balance. With a number of cards charging up to 20% interest, it’s easy to see why many U.S. households are drowning in debt.
Trying to pay off high-interest debt can often feel like a never-ending game of catch-up. That’s why we suggest looking into cheaper ways to borrow money, such as debt consolidation. Here are just some of the benefits of consolidating debt.
Turn multiple payments into one payment
Maybe you’ve grown tired of not knowing when certain credit card payments are due. Rather than continue to be stuck in this juggling act for years on end, think about consolidating your balances into a single source. You’ll no longer have to worry about keeping up with multiple payment deadlines, making paying down your debt simple and stress-free. Just know that consolidating credit card payments doesn’t mean you’re eliminating debt.
Benefit from lower interest rates
Unfortunately, you aren’t going to make much progress getting rid of debt by paying the minimum, especially with a card that charges anywhere from 12-20% interest. Now imagine combining these debts into one loan that carries a fraction of the interest. Before starting the debt consolidation process, take a look at your credit score. If it’s somewhere in the 720-850 range, there’s a good chance you’ll qualify for an interest rate as low as 4%. Keep in mind, the difference between a 4% and a 20% interest rate could lead to thousands of dollars in savings over the course of a year.
Improve your credit score
Payment history, amount of debt, credit history, your mix of credit accounts, and new credit inquiries all factor into your credit score. For the purpose of this article, we want to take a closer look at how the amount of debt, also known as your credit utilization ratio, relates to debt consolidation.
Credit utilization ratio comes from the outstanding balance of all your credit cards (what you owe) divided by your credit limit. Let’s say you have a total of $8,000 in credit still available on two credit cards, with a balance of $2,000 on one of them. In this scenario, your credit utilization ratio is 25%.
Another plus to debt consolidation is that should you consolidate using a personal loan, you will likely see an improvement in your credit score within just a few months. There’s no question that a lower credit utilization rate translates to better long-term financial health.
Reduce the payoff length
Just because you stay current with payments doesn’t necessarily mean you’ll pay off your credit cards in a timely manner. Depending on what you owe, it could take decades to eliminate this debt — all because of that pesky interest.
This is, once again, where debt consolidation can be advantageous. Your lender will account for income, credit score, and remaining balances when determining the length of your loan. As long as you make on-time payments with your new loan, you should have no problem paying off your debt faster with a consolidation program.
Enjoy peace of mind
While we touched on this earlier in the article, it’s worth elaborating on a bit more. Even the most organized person will eventually have trouble managing multiple credit card payments. As you may already know, this kind of stress can keep you up at night and prevent you from doing what you enjoy. Don’t let your debt impact your quality of life! Debt consolidation offers the convenience of one balance and one monthly due date.
For many people, consolidating debt is a great first step toward controlling one’s finances. That said, it may not be the right move for everyone. Talk with a lender for more information about the process and to see if debt consolidation makes sense based on your situation.
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