Pros & Cons, Unsecured Debt Consolidation
Unsecured debt consolidation lowers your rate, helping you pay off your debt faster with one easy payment. You can also reduce your monthly payments. However, consolidating your short-term loans can temporarily reduce your credit score. You may also be tempted to use your paid-in account, creating greater financial problems.
Lower Interest Rates and Payments
Consolidated loans and debt management plans (DMP) can reduce your rates. Home equity or personal loans offer lower rates than credit cards and can be used to pay off bills. DMP companies negotiate lower prices with your creditors.
With discounts, your minimum monthly payment will also be lower. Even though it’s tempting to pay the minimum, keep paying what you have now to quickly lower your debt. If you need to reduce payments, consider extending the term of your loan.
Easier to Arrange
Consolidating your bills makes payments easier to handle. Instead of several accounts to manage, you only have one. DMP only requires one monthly payment to the management company, they then handle your account payments.
Temporarily lowering the Credit Rating
A loan or DMP will temporarily reduce your credit score. By opening a loan account, your rating is lowered for credit activity and loan amount. You can compensate for this in part by closing the account for which you pay.
DMP will lower your rating if your creditor sends a notification to the credit reporting agency. Not all creditors report arrangements with the DMP company. If so, in the short term you might not be able to open a new account. After one year of regular payments and debt reduction, you will qualify with most lenders.
The Temptation to Use Open Credit
Paying an account can make it tempting to pile up credit card debt again. This can put you in a worse financial position. To avoid this problem, close accounts that you don’t need. Remove the credit card from your wallet and leave it in a safe place, only for use in an emergency.
Before signing a contract to consolidate your debt, investigate the prices and conditions of several companies to find the best deal. Online websites allow you to find this information easily.