How debt consolidation can be used to reduce credit card debt
Nobody desires to be in debt. Being in debt ultimately reduces your income, as much of your useable income goes to repaying your debts. Credit cards are responsible for much of Australia’s personal debt and pose a serious problem for anybody trying to free themselves from debt. While some credit cards have rates below 10%, the norm is between 15-20% with some cards charging in excess of 20% interest.
High credit card interest can cripple your attempts to repay your debts. For example, if you own a credit card that charges 20% interest, spending $10,000 over a year will result in you paying $2,000 in interest. In a situation like this, you are paying $2,000 in interest simply to maintain the principal of your debt. In reality it is necessary to pay twice that amount to begin to make significant repayments of the principal.
It is for this reason that a debt consolidation loan can provide a useful solution for your debt problems. Debt consolidation allows you to take all your existing forms of debt and combine them into a single debt with a reduced interest rate. Commonly debt consolidation loans have a cheaper interest rate than other forms of credit. As a consequence debt consolidation makes your debt more manageable. A debt consolidation loan may also give you:
- A Fixed Interest Rate
- A Low, Manageable Monthly Payment
- A Choice of Payment Terms
Obtaining a fixed interest rate can make debt management significantly easier. With a fixed interest rate there are no surprises relating to variable interest rates or fluctuating monthly payments. Even if interest rates go up in the economy your loan will not be affected.
With a low manageable monthly payment you can budget more effectively and also you free up more money that can be allocated to your repaying your loan or alternatively give you a higher disposable income.
A choice of payment terms gives you greater flexibility to choose the term length of your loan, anywhere from one to seven years. While many people opt for seven years to secure a low monthly payment it is perhaps a more sensible option to go for a three to five year loan. The benefits of these term lengths are that they result in you paying significantly less in interest.
However, debt consolidation only works if you are willing to abandon your credit cards and develop more sensible financial practices. Although debt consolidation reduces the amount of interest you are paying your debt levels remain the same. As a consequence, continuing use of your credit cards will continue to increase your debt levels. Consolidating your current debts and then continuing to use your credit will make matters worse. So it is imperative that if you obtain a debt consolidation loan you discontinue use of your credit cards.
Debt consolidation benefits those who wish to take control of their debt situation and reduce the interest they are paying; however for the most effective results you also need to have self discipline when dealing with your finances.
If you would like to find out if debt consolidation is appropriate in your situation then fill in the following form or call Debt Relief on 1300 658 662 and our staff will assist you in finding the most effective debt relief solution.
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