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The Pitfalls of Debt Consolidation and Avoiding them    

Not Using The Cheapest Form Of Debt Available

  • Home loans offer cheaper credit, and one way to give yourself some breathing space is to
    consolidate your debt into your bond. This is where interest rates are much lower than credit card, personal loans and vehicle finance.
  • In order for this to be beneficial, you have to repay the loan over the short term rather than capitalizing it over 20 year term. Be sure that you are disciplined enough, otherwise you will end up paying much more!
  • Credit cards and bank overdrafts to name a few can attract maximum interest, so adding them to your lower interest bond can save you even more money.
  • Saving on interest has the same net result as earning interest.
  • The savings are due to your bond being the cheapest form of debt available.
  • By consolidating all your debt into one account, you will also save a lot on monthly charges for all your separate accounts. If you calculate all the monthly administration fees for your mortgage bond, personal loans, HP installments, bank overdraft, retail credit card etc, this can add up to a substantial amount at the end of the day!

Beware Of Plastic!

  • Store cards and credit cards may be convenient, but they are also an easy way getting caught up in the debt trap. The reality is that in most cases people get so dependant on this kind of credit that it ends up being a long term liability.
  • The best investment you can make is to repay high interest debt. By paying off debt, you get one of the best returns available, tax-free. The tax-free return you receive from paying off debt is likely to be greater than any returns (which are likely to be taxed) you receive from an investment.
  • Always pay the full amount owing on your credit card. If you do not, you will be charged a punishing rate of interest from the date of purchase. The so-called budget account on your credit card is a misnomer, as you pay a high rate of interest.
  • Use a credit card to get 55 days’ interest-free credit by buying at the start of the buy-and-pay cycle and repaying the debt in full by the due date. This option does not apply to cash withdrawals and petrol purchases, on which you pay punitive interest rates from the date of the transaction.

Taking Your Credit For Granted

  • Unfortunately you may be reading this too late to have kept you from making this mistake, but it is never too late to start improving your credit rating.
  • In the last few years the way lending decisions are made has become much more automated. The way decisions are made has changed dramatically, for the most part decisions are made based on certain guidelines and not left up to subjective humans.
  • This places more and more importance on your credit rating when applying for a loan. How good your credit rating or “scores” are, depends on several factors such as: Current credit balances, amount of current available credit, late payments (How many, How late, How recent, Type of Account) and recent inquiries about your credit.
  • If you are planning on getting a mortgage loan, make sure you are making all of your current payments on time and avoid any unnecessary inquiries into your credit. In other words, don’t go out shopping for a car or new furniture and have sales people all over town running credit checks on you.
  • If you want to have the highest scores possible, and therefore qualify for the best rates available, it is best to be patient and wait until your loan is done before you do things that will affect your score.

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