Many financial experts, including Suze Orman, suggest consolidating debt as one way to begin paying it off at a lower interest rate. There are several ways to do this. The easiest way is to negotiate a lower interest rate with one of your current credit card companies and transferring all your credit card debt to that card. However, if your debt includes credit cards and loans, your best best would be a consolidation loan. If you qualify, you would be loaned money by a lending institution that would then be used to pay off all your debts. Then you would be responsible for one payment per month for a specified period of time. There are many benefits to consolidating your debt.
Knowing your Numbers
One of the most important effects of debt consolidation is that you are aware of exactly how much debt you have, and can plan for the future. If you've negotiated a good rate, you should be able to pay off your debt as well as have more money per month to pay current bills or save. The debt counselors at the Consumer Credit Counseling Service warn that the only way to make debt consolidation continue to work in your favor is to cut up the cards from the accounts you've consolidated.
Help your FICO Score
Consolidating debt has no effect on your credit score in and of itself, but it does improve your score if you pay off the debt more quickly, making your payments in full and on time, as a portion of your FICO score is based on your debt to income ratio. If you can refinance your debt at a significantly lower rate, your debt will, over time, be less and actually help your FICO score. Less debt, and debt paid off diligently, gives you a better FICO score, according to financial experts at SuzeOrman.com.
Cause Additional Debt
Unfortunately many people who get a debt consolidation loan end up owing more money within two years, according to Chris Viale of Cambridge Credit Corporation. As few as 30 percent of people who are approved for a debt consolidation loan actually are in less debt two years later. In fact many of them, he said, are in greater debt and in danger of losing homes.
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