Are you one of those who have a credit card for each store, each with a bill through the roof? In a scenario like this and If your credit is bad, debt consolidation for bad credit emerges as a strategy to save and reorganize household finances.
Among its advantages is that it allows “to reduce financing costs and time, allows us to have a comfortable payment to comply and allows us to reorganize financially to have security and economic tranquility”.
Next, we answer several questions about debt consolidation.
1. What debts can be consolidated?
Among the debts that are recommended to consolidate are the credit card accounts because with these if the consumer only makes the minimum payment each month, it may take more than 10 years to settle them, Harrison said. Unsecured consumer loans (which are not backed by payment to a tangible asset) can also be consolidated.
2. How is consolidation carried out?
“There are three vehicles to do so: through a personal loan from a bank or cooperative, a mortgage-backed loan or refinance the house to consolidate debts,” Harrison said. He indicated that the experts are inclined to recommend more personal loans, since with the other two options if the consumer does not comply with the payments, he is liable to lose his principal residence. In addition, personal loans can be settled between 5 and 7 years, while with credit cards the accounts “have no end while they continue to be used”. It recommended resorting to banks or cooperatives for these personal loans since they offer lower interest rates than the financial ones and distribute the monthly payments more equitably between the principal and the interest. “In the financial sector, in the first two years most of the payments go first to interest and then contribute a portion to the principal, which makes the cost of financing higher,” he explained. Once the loan originates for the value of the debts and the money is used to pay off the credit cards, that loan begins to be paid.
3. What other options are there?
In case the consumer does not have enough good credit to approve a personal loan in a bank or cooperative, they have the option to assume higher risk and apply for a mortgage loan or refinance their home. The disadvantage in this case, apart from the risk of losing the home, is that it would take 20 to 30 years to settle.
4. What to do after a consolidation?
Once the loan is originated and the money is used to pay off the credit cards, Harrison recommends keeping one to cover any unforeseen situation that may arise and canceling the remaining ones to eliminate the temptation to go back into debt. “We can send a letter to where we are paying the credit cards notifying the cancellation of the card because if I keep it in my hand I will use it and fall into the same scenario”. In fact, he stressed that it is estimated that out of every ten that consolidate their debts, six have the debts they had canceled in a period of three years, plus the loan they used for consolidation. “If they do not change their consumption habits, it’s like putting an artificial patch on the situation,” he said. Using little credit cards and pay them off when the bill arrives is an alternative, although the best is to develop the habit of saving.
5. Is the credit affected?
Harrison ruled out that the cancellation of credit cards adversely affects the credit score of the person. “When the card is canceled, the credit report reflects the maximum credit that was granted and points are awarded for the way I paid and for the credit I still have available,” he said. In addition, paying without delay the loan that was made to consolidate can help improve that score.