How To Get Rid Of Bad Debt Through Debt Consolidation
Section 9 Module 3
What is 'Debt Consolidation'
Debt consolidation means taking out a new loan to pay off a number of liabilities and consumer debts, generally unsecured ones. In effect, multiple debts are combined into a single, larger piece of debt, usually with more favorable pay-off terms: a lower interest rate, lower monthly payment or both.
You can use debt consolidation as a tool to deal with high-interest credit card debt.
Methods of Debt Consolidation
There are several ways you can lump debts into a single payment. One is to consolidate all their credit card payments onto one new credit card – which can be a good idea if the card charges little or no interest for a period of time – or utilize an existing credit card's balance transfer feature (especially if it's offering a special promotion on the transaction).
Personal loans often charge interest somewhere between 3-5% per annum, while credit cards charge around 36% per annum.
- It therefore makes sense to take out a personal loan with a low interest rate, and a reasonably long payment term, to make the monthly payouts affordable.
- You can then use the money from the personal loan to pay off all the credit cards, and then cancel them with the bank.
- Do not keep an empty credit card active, simply because you haven’t got out of the habit of using credit cards, and may rack up debt again.
- Make sure, you physically cut up the card, after the debt is payed.