Debt consolidation- good or bad idea?
This is a debt management process that merges all your various debts into one single payment.
Debt consolidation essentially involves the pooling of balances on loans and credit cards into one account. The main goal of debt consolidation is to get a lower interest rate.
If you are struggling to keep up with various repayments you have, debt consolidation may provide you with a simple way to get back in control of your finances. There are various debt consolidation options from which to choose, but it’s important that you ask yourself if it’s a good or bad idea before you sign up.
When is debt consolidation a good idea?
Debt consolidation is a good idea when you have a good credit score. This is because when you apply for debt consolidation you need to be able to prove to the lender that you will be able to afford to pay the amount that you will borrow off.
Debt consolidation is also a good idea when you have a stable source of income and when you have a repayment plan in place.
It’s important to keep in mind that debt consolidation does not get rid of the debt that you have. So you need to identify the habits that will help you get out of debt, so that you won’t fall into the same habits once your debt has been paid off. Debt consolidation may result in you having extra money at the end of every month so you need to be disciplined enough to ensure that you don’t start using too much credit again.
When is it a bad idea?
If you view debt consolidation as the only debt solution, it’s a bad idea. This also applies if you cannot control your spending habits.
It’s a bad idea if you will ultimately end up with a higher interest rate.
It’s also a bad idea if you are doing it just so that you have space in your budget to spend more.