If you continually abuse your credit card, your financial situation will be difficult. There are many benefits of using a credit card as a purchasing tool. For example, if you have a credit card, you don’t have to carry cash to buy something that exceeds your budget. Of course, it is precisely because of these conveniences that the person who owns the credit card can miscalculate their purchasing power and often fail to make ends meet. But it’s not too late to make up for it. The only thing you need to do is to consolidate your debts. In other words, a new credit account is opened to pay off your original debt, which means that you would be left with a large amount of debt in a lower interest rate to pay every month. You may be wondering how debt consolidation loans work and how you can use your credit card more sensibly after consolidating your original debts. Here is some advice.
How Debt Consolidation Loans Work
There are two types of debt consolidation loans: secured loans and unsecured loans.
- Secured debt consolidation loans
Secured debt consolidation loans require collateral, while an unsecured loan does not. You can use secured loans for unsecured debt; for example, a borrower can use home equity loans for credit card debt consolidation. Secured debt consolidation loans generally have a lower interest rate with the use of collateral. So if you can meet the requirements of secured loans, you will pay less interest. A home equity debt consolidation loan is a secured debt consolidation loan that provides a fixed interest rate. Home equity loans for debt consolidation may be risky, though. The repayment period can be 10 years or longer. If your house depreciates during this time, you may owe more than the value of your house.
- Unsecured debt consolidation loans
Unsecured debt consolidation loans do not require collateral and are generally easier to obtain approval. However, the debt-to-income ratio of unsecured debt consolidation loans can be as high as 50%, and the FICO credit score can be as low as 585 points. It is convenient to apply for an unsecured debt consolidation loan because the loan is available online through banks and marketplace lenders. Thus, you can immediately figure out if the loan is right for you.
Both secured and unsecured debt consolidation loans can save you interest and monthly payments and potentially increase your credit score. However, it is not a good idea for everyone because the interest rate may be higher in certain situations.
Smarter Credit Card Use After Debt Consolidation
- Stop using the credit cards
You must keep in mind that you still owe the same amount of money to repay. Do not increase your current debt.
- Organize your existing credit cards
Find out the credit cards that you do not really need and put them in places that are not easy to find to ensure that your spending will no longer exceed your budget.
- Do not close your credit card account immediately
Closing a credit card will affect your credit score. It is unwise to close a credit card account immediately after consolidating your debts because by doing this, your credit score will drop a lot.
Best Debt Consolidation Programs
Here are some of the best debt consolidation programs in the US as of 2019:
- National Debt Relief
- Amer Debt Enders
- OneMain Financial
- Debt Cons Care
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