Debt Consolidation: Understanding Credit And Debt

Debt consolidation involves transferring the balances from multiple accounts with relatively high interest rates to one account with lower interest. A debt consolidation loan does not reduce debt so much as restructure it in beneficial ways.

Debts are either secured or unsecured. Secured debts are tied to a tangible asset like a car for a car loan or a house for a mortgage. If a borrower stops making payments, lenders can repossess the car or foreclose on the house. Unsecured debts are not tied to an asset. The most common types include credit cards, medical bills and signature loans.

Debt and Credit

Most people get into debt difficulties because credit is easy to get and hard to control. Here are some warning signs that debt may be getting out of hand:
> you can only make the minimum payments on your loans and other debts each month.
> you apply for new credit cards to pay off old ones, thus rotating, but not retiring, your debt.
> you are near the limit on all your cards and accounts.
> you are being denied new loans because of your bad credit history.
> you have had to resort to bad credit financing.

The rule of thumb when using credit is known as the 20/10 Rule: Don’t borrow more than 20% of your annual net income and don’t let your loan monthly payments get higher than 10% of your monthly net income. For example, if you take home $4,000 a month, your total payments on credit debt should be no higher than $400 (excluding your mortgage and second mortgage).

Learn more about other steps you can take, in addition to debt consolidation, by visiting Bad Credit Second Mortgage Now. There, you can also get a free quote on a debt consolidation loan to see if it could be a step in the right direction for you.