| Combating Bad Credit |
| Written by Brain Summer | |
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A common method is to seek out further finance that will consolidate your debt and thereby make it appear easier to manage. This method is fraught with danger, and should be considered only in certain circumstances. A lot of financial institutions will not even lend you money should you state that the reason is for the consolidation of debt. There is a logical rationale behind this policy. Consolidating your debt into one amount can actually get you into deeper financial woes. As an example, let’s take a person who decides to consolidate their personal short term debt, this would include retail store accounts, credit cards, personal loans and the like. It would seem logical that If they were starting to have difficulty with repayments that they could consolidate this into a single personal loan account with one institution. The higher value loan along with your current credit score may even get you a better interest rate, after all credit card interest and retail store accounts are on average higher than the personal loan, even if your credit history is poor. To top this off, the term of the loan can and should be longer than the other finance options. These two factors combined can greatly reduce your monthly debt repayments whilst keeping your overall debt burden the same. Now comes the bad parts. The first consideration is that over the longer term of the loan, you will be paying a greater amount of interest on your debt. Some people find this an acceptable sacrifice in favor of the monthly relief that it brings. But remember, this is for a longer term, your debt may have moved from an average repayment of between six to twelve months to a repayment scheme of two to five years. There is a very high chance that your circumstances will change again over this period, the most common one is the one why banks don’t like loans for consolidation and that is complacency. After a few months of the monthly repayment reductions, you will probably find that you have extra cash on a monthly basis. A person who is accustomed to using revolving credit on the likes of credit cards and retail store accounts will most likely revert to using them again; the accounts may have been paid off but the chances that they were closed are minimal. Human nature takes over and small purchases will start to be made with the very same credit facilities that made you seek out debt consolidation finance in the first place. Before you know it, you are in an even worse position as you will again be struggling to repay this debt and on top of it you have the additional debt consolidation loan for the next couple of years. Consolidating debt loans requires tremendous long term discipline, which is a contradictory trait to those who generally seek them. If you do take out one of these loans, ensure you have a budget in place, and don’t fall into the complacency trap thinking you can afford more debt. Rather take the extra cash that you have and reduce the debt consolidation loan quicker, once that is paid off, re-look at your financial situation you’ll often find that your credit scores have increased and debt is now more affordable than ever. You’ve learned a valuable lesson, one that should not be forgotten. Another option of addressing your bad debt burden, made popular by the financial guru Dave Ramsey, is to pay off your debts one at a time, starting with the smallest one. If done correctly, this concept will maintain or even improve your credit score without you knowing it. Select your smallest debt or alternatively the debt with the highest interest rate, in most cases these are the same, and pump as much money as possible into it. You have to do this whilst maintaining the absolute minimum payment on your other debts. This sounds a lot easier to do than it is in practice, particularly if you are having trouble paying off this debt in the first place. Remember that creditors are usually open to negotiation, the last thing that they want to do is foreclose on your debt; it costs them money to go through the process as well as increases their risk of writing the debt off. Create the repayment plan that would suit you and show the creditor how much you can pay them for a limited period. If you give them the overall plan they will also see that somewhere on your repayment list they will be getting paid at higher amount and therefore a quicker rate when their turn comes around. This may be more acceptable to them and they may even try to help in other ways. There are always options available to you when you find yourself in a bed debt situation, but communicating and applying discipline can get you out from under the heel of the debt boot. |
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