Understand the myths of debt consolidation before opting for it to restore your finances

If you are thinking of getting rid of all your existing debts, you may consider debt consolidation. There are different views about debt consolidation. However, the truth remains that debt consolidation is actually, an effective financial strategy utilized by individuals attempting to have a firm grip over credit card debts. They must be owing thousands of dollars to various credit card companies and are trying to manage their overwhelming debts using a debt consolidation loan.

As per https://www.huffpost.com, “Debt consolidation is undoubtedly a great way to pay off those high-interest rate credit cards and will save you thousands of dollars in interest in the long run. The main benefits of consolidating your debts are single monthly payments and fixed interest rates. Keep in mind that once you pay off your credit cards through a personal loan, you’ll have a zero balance on all your accounts.”

However, you need to be pretty disciplined and stay away from using credit cards again and accumulating a host of debts after having paid off the previous ones. You need to devote some time to understand the root cause of your persistent debt issue in the past. Identify the precise reason for being in such a financial mess. Do you think that it was simply because of inefficient money management skills? Or were you splurging your money on groceries, outside food, or luxurious travels? No matter what, you need to pinpoint the root of the debt issue before you put in your debt consolidation loan request. You may come across a host of debt consolidation myths so it is time we debunked those misconceptions for you to go ahead with debt consolidation without having any second thoughts about it.

Myth: Credit Counselors Would Cut Your Monthly Payments in Half

If you come across a credit counselor who claims that she could magically reduce your monthly repayments by about 50 percent, do not believe her. For instance, suppose you have failed to pay two monthly repayments of $200 each so the third outstanding due would be for $600. A credit counselor attached to a debt management organization may be successful in re-aging that bill for getting your payment back to $200. However, that missing $400 certainly would be added into the total amount outstanding and you need to pay interest on it too.

Myth: Debt Consolidation Is Nothing but a Scam

Debt consolidation is definitely not a scam but a legitimate way of paying off your overpowering credit card debts. However, you must do a thorough background check of the debt consolidation agency that is offering you the solution. After the economic upturn in 2008, numerous predatory lenders came up and started taking advantage of all those victims of the recession who suddenly landed up neck-deep in debts. However, you must do ample research and identify a reputed agency with the right certifications and accreditations. You must watch out for red flags like if the company is asking you for some money upfront. Avoid giving any lump sum money to the company upfront as there are regulations in place that prevent companies from asking for upfront money while consolidating debts. Choose one of the trustworthy and reputed companies such as https://www.nationaldebtreliefprograms.com/for perfect debt solutions.

Myth: Debt Settlement Is Actually the Most Affordable Way of Squaring Your Debts

Debt settlement companies often promise debt settlement for just a fraction of the amount you actually owe. It may sound like a wonderful deal but is not so in reality. Debt settlement companies are used to charging a great deal of money as fees generally, 20% to 25% of your final settlement. Moreover, the IRS would be regarding whatever money you save in the debt settlement process as an income and you would require paying income tax on that specific amount of money received.

Debt settlement agencies usually stop processing any payments to your creditors and they negotiate individually with each creditor and that is certainly time-consuming. During the negotiation process, interest and the late fees are all getting accumulated along with the already growing balance, as well as, the missed payments. All these have an adverse impact on your credit score. We know that debt settlement entry would be present in your credit report for the next seven years.

The reality behind debt settlement companies is that they hope to cut down the owed amount in half. However, when the interest rate penalties, fees, and taxes on the forgiven amount are added together we find that the actual savings would be dwindling to somewhere between 10 percent and 25 percent. Your credit card would be scarred or flawed for seven years. Debt settlement, therefore, could be a risky proposition.

Myth: Debt Consolidation Culminates In More Debt

This is certainly a myth. Often people believe that debt consolidation does not solve the issue from its roots. Debt consolidation by itself does not culminate in more debts. Your debts could be wiped clean by debt consolidation but you need to understand the root cause of all your debts and make amends accordingly. You need to modify your lifestyle and spending habits; otherwise, you would end up with debts again if you go on splurging uncontrollably. There are numerous effective tools available online that assist in creating a budget and provide you with vital information regarding critical financial practices such as creating an emergency fund etc. Booting your overall financial literacy is the best way of remaining debt-free.

Myth: Your Credit Score Is Adversely Impacted By Debt Consolidation

Your credit score has two major components, the payment history, and your credit utilization. When we talk about utilization we mean how much credit is available to you weighed against how much you own. When you opt for consolidation loans, you may see a dip in your credit score early on because of the accounts you close and new line of credit opened. This is temporary though, and you will see your score recover and rise dramatically as you keep meeting the monthly payments. Your debt balance goes down as well, which is a net win. The dip in the score should not be an issue because you are unlikely to be in the market for securing a new line of credit anytime soon anyway as long as you are still in debt. You will certainly be better off in the end once you are free of debt.

Conclusion

Debt consolidation loans are a fantastic way to minimize debt for those who can negotiate terms with willing creditors. The single fixed monthly payment over a fixed time period certainly helps keep things in control, but you have to make sure you are on top of things at all times. Even in the future, once you are debt free, try to use common sense before applying for new loans and lines of credit.