How Does Debt Consolidation Work
So how does debt consolidation work? Initially
does not help with credit repair but over the long run, it does. Though this is something you can do yourself, you can also get a credit card debt consolidation company to work with.
Either way, the process is the same. Take all your bills, puts them together (instead of having multiple accounts), hence the word consolidate, so that you can:
- Lower your payments
- More easily pay off debt
- Lower your interest rate
- Long term - credit score improves due to on time payments.
- Save Money
If you use a
credit card debt consolidation company,
you can get rid of a lot of headaches by using their expertise instead of struggling to do it yourself.
Let me give you a bit more detail with an example of how you can save with this process..
Example of How Does Debt Consolidation Work:
Suppose you have accumulated debt on 2 credit cards, as well as medical bills and a personal loan. The details of these accounts are:
Outstanding balance on Chase credit card (16%) - $9000
Outstanding balance on HSBC credit card (21%) - $13000
Amount you owe on medical bills (11%) - $18000
Personal loan (12%) - $5000
Just using a simple calculation, the average interest rate = (16% + 21% + 11% + 12%)/4 = 15%
in a consolidation program, the interest rates on your debts are negotiated down to:
Medical bill 10%
Credit card C - 13%
Credit card H - 7%
Personal loan - 9%
So, the average interest rate = (10% + 13% + 7% + 8%)/4 = 9.5%
Now if your total debt amount is $45000, you'll save = (16% - 9.5%) x 45000 = $2925 per year.*
*This is an estimate for illustration only, based on averages and the full debt amount, the numbers will vary using the proper compound interest and as the debt is reduced.
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