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Examining the pros and cons of debt consolidation

While most in Rockingham County may not classify themselves as being deeply in debt, a close examination of one’s spending patterns compared to national statistics may prove otherwise. According to the website ConsolidatedCredit.com, the average American household carries over $16,000 in consumer debt. That number increases to $54,000 for households that routinely use credit cards.

The danger in accumulating too much debt is that repaying it can quickly swallow up much of one’s disposable income (the money left after meeting one’s tax obligations). The online financial publication Money-Zine reports that the average homeowner sees over 15 percent of their disposable income go towards financial obligations other than their mortgages.

Recently, many have begun to recommend debt consolidation as an effective way to resolve one’s liabilities. The general idea is that by consolidating all of one’s debts into one account, he or she saves money in principle and interest payments. This debt relief method does offer some advantages, but it does not come without its drawbacks, either.

Aside from reduced monthly debt payments, debt consolidation also offers benefits such as:

  •          The chance to avoid extensive damage to one’s credit score from missed payments.
  •          Lower interest rates for certain debt consolidation tools.
  •          The ability to pay debts off faster due to reduced interest.

However, if not handled correctly, a debt consolidation plan can leave one worse in an even worse financial situation. If he or she attempted to consolidate his or her debts through an unsecured loan or by transferring them to a single card, more damage may be done to his or her credit profile if he or she is unable to make the payments. If the same thing happens after one has attempted to consolidate debt through a home equity loan, then he or she could risk foreclosure. 

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