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Sunday, December 22, 2013

Debunking myths about debt consolidation

Debt consolidation myths
Debt consolidation helps pay off debt and improve credit
By Gale Newell

Needless to say, money and finances are a couple of the scarier issues adults are forced to face, not to mention the mass confusion that commonly comes along with these issues. When it comes to getting your finances in order, the complicated agreements and regional variations frequently lead to mounting stress and the last thing anyone needs are waves of ambiguous and misguided information.

Frequently, when many people find themselves stuck in that ever-sinking hole, turning to debt consolidation can prove to be an excellent strategy for financial redemption. However, while taking out a series of debt consolidation loans can often prove to be the best option, it is also one of the most misunderstood methods of money management there is.

When opting to consolidate one’s debt, most people immediately jump straight into finding a debt consolidation firm with the hopes that all their financial woes will magically disappear. Finding a debt relief program that suits your needs is of the utmost necessity, however one must first understand the debt consolidation process. While there are a number of myths surrounding consolidation loans, here are a couple explanations to help clear up some of the common misconceptions.

Myth #1: Debt consolidation = Debt settlement

Whereas many people see the terms “debt consolidation” and “debt settlement” as interchangeable, the two are in fact very different.

Debt settlement is a strategy in which the individual in debt and the creditor agree on a reduced balance that will, as implied, “settle” the debt. Although the individual is allowed to settle their debt at a reduced amount, there is a significant penalty imposed on the debtor’s credit report that can often lead to future financial obstacles.

On the other hand, debt consolidation avoids those credit score penalties because the debtor is repaying the full amount of his or her debt. After packaging each individual debt into one lump sum, in other words consolidating one’s debt, interest rates are then adjusted, thus allowing for more workable monthly payments.

Myth #2: Debt consolidation can hurt my credit score

The truth is nearly everything can hurt your credit score. However, if done correctly, debt consolidation can help to improve your credit score as you pay off your debt.

Every time a debt is paid off in full, your credit score receives a little boost. Seeing as debt consolidation is simply the paying off of a series of smaller debts, your credit score can actually see significant improvement by opting to go with this strategy.

Myth #3: Debt consolidation only leads to more debt

Although technically debt consolidation is simply taking out a loan in order to pay off another, thus leading to more debt, it is important to remember that not all debt is the same. This is where interest rates become of the utmost importance.

In theory, the debt would take longer to pay off by making smaller monthly payments as opposed to larger ones. As I mentioned, it’s all about the interest rates. By decreasing the interest rates of your debt you are thus decreasing the pace at which the interest accumulates. Combined with making efficient monthly payments, as opposed to minimum payments, it is actually easier to pay off your debt sooner than following conventional methods.

Myth #4: Debt consolidation is only for people who don’t know how to manage their money

False! In my opinion this is the most ridiculous of all debt consolidation myths, as if such a strategy could be considered somewhat of a stigma. This couldn’t be further from the truth. In fact debt consolidation is a strategy that is very common amongst the highly-wealthy, as well as managing corporate finances.

Debt consolidation is simply the restructuring of one’s debt so as to make payment as easy and efficient as possible, specifically tailored to each individual’s needs. Regardless of one’s economic status, it is hard to believe anyone would choose to pass on the most advantageous plan. 

About the author: GaleNewell writes about the many aspects of debt and reviews top debt settlement companies. She believes consumers should be as informed as possible when looking into debt relief companies. On her down time, she loves going to sci-fi conventions and listening to Eddie Money.

Image license: Images Money, Creative Commons