Debt Consolidation Limits

Debt consolidation may be a good option to consolidate your credit card and store credit debts. However, what about debts such as student, automobile, and medical loans? In some cases, those debts may be substantial and extremely difficult to consolidate. If you have significant debt that you cannot roll into the loan with your credit cards, there’s a chance that debt consolidation will only have a modest impact on your credit.

Borrowers with a high amount of varied debt will gain little in terms of credit mix or credit utilization if they chose to consolidate their credit cards. The new loan line borrowers’ debt a little bit and make them less likely to miss a payment. However, they’ll still have a great deal of debt to contend with for a long period, and that’ll continue to weigh on their credit rating.

If you have high levels of debt that cannot be consolidated, it may make sense to choose options other than debt consolidation. In some cases, borrowers can deal with debt more effectively by selecting a debt management option better suited to their particular situation. For example, many lenders have programs available to help borrowers consolidate complex student loans.

In other cases, foregoing a new loan and developing a strategy to pay off all your debt methodically ple, for many borrowers, using techniques such as the debt snowball or the debt avalanche to focus on and systematically pay off debts may be a far superior option to debt consolidation. It may also be a better way to maintain a good credit score.

Interest Rate Traps

One of the ways that borrowers can inadvertently worsen their financial situations is by signing up for a debt consolidation loan and not paying attention to the terms and conditions. Many loans have variable interest rates, meaning the lender has the option to change the interest rate over the life title loans Virginia of the loan. Unfortunately, that “change” is hardly ever in the form of a lower rate, and that subsequent rise can have a serious impact on a borrower’s ability to repay the loan.

A 0% ple of a variable rate debt consolidation loan. Borrowers transfer all their debt onto one of these cards with the intent of paying it off during the introductory rate period, usually 6-18 months. However, once that period ends, any remaining balance will be subjected to a much higher interest rate. Not only that but the fine print often states that the lender can retroactively collect all interest on the original balance if you didn’t pay it off by the end of the intro period. Many borrowers are then unable to cover the payments at the new rate, and they must either miss a payment or start using their previously paid off credit cards to keep up with their debt consolidation loan. Whatever option they choose, borrowers usually end up with a credit rating that’s worse than when they started.

You can avoid these situations by carefully reading a lender’s terms and conditions prior to taking out a debt consolidation loan. If you don’t believe you can pay off your debt before a loan’s introductory rate period expires, don’t select a variable rate loan to consolidate your debt. Instead, you should choose a fixed rate loan whose interest rate will remain the same throughout the life of the loan.

You get a debt consolidation loan and use it to pay off all your credit card debt. Then, nine months later, you have the new loan and you yet again have high balances on those old credit cards you just paid off. Worse still, you’ve taken out new credit cards and store credit as well. Your credit utilization rate has risen substantially and driven your credit rating lower than ever. You’re starting to have trouble with all those debt payments again, too. Sadly, this scenario plays out more often than you think with debt consolidation loans.