In this article, we will tell you what debt consolidation is and how it works, what profile you must meet if you are interested, and what are the advantages and disadvantages of applying for it.
Alejandro has a stable job and although he does not have the money left over, he generates the necessary income to continue paying the debts, among them, his credit cards.
A year ago he went on a trip and divided all his expenses among the three credit cards he had, according to him to take advantage of the different cut-off dates and thus not being so hasty with the payments.
Unfortunately, over time he continued using his cards and, like any other person, other expenses arose that he had not contemplated.
Although it took several months, he began to notice that by having new expenses, he was paying less and less on his credit cards and, at the rate he was going, he was close to paying the minimum than paying the total balance.
When he was most worried, he learned that there was an alternative that would help him to make his debts cheaper and therefore less complicated to settle.
This option turned out to be a debt consolidation.
Does it sound familiar to you?
Have you been or are you in a situation similar to Alejandro’s?
Are you interested in knowing in detail what this option is about?
The first thing you should know is:
Currently, there are two ways to consolidate a debt:
- With a credit card
- With a personal or payroll credit
1.- Credit card
The “official name” is Transfer of Balances, which, as you can imagine by what we have been telling you, is to pass the debt you have on your credit card to another bank that offers a lower interest rate, in this way you reduce the amount you are paying for interest.
And how does a balance transfer work?
We explain it to you with an example:
Imagine that you have a debt on your American Express card and you transfer it to a Santander card, in which you will be charged less interest and thus paying it off will be cheaper.
In simple words, what happened was:
Santander paid for you the debt you had with American Express and now you will have to pay Santander the same amount as you had but at a cheaper interest rate.
Why do banks do this?
It is one of the many tactics they have to “steal” customers from the competition.
Do all apply for a balance transfer?
No, in fact, banks reserve the authorization of this operation to users with good credit history and who are not over-indebted, because they must ensure that the person has the resources to continue paying.
Unfortunately, this can mean a limitation, let’s be honest: many times, people who want to transfer their balance are those who, for one reason or another, let the “snowball” grow and can no longer pay the minimum your credit cards.
But the truth, this makes sense.
Would you dare to pay the debt of an acquaintance knowing that he has no money to pay?
Financial institutions if they want to win customers, but they are interested in attracting those who can continue paying.
How do you get a balance transfer?
- By invitation: some banks send their users, through account statements, emails or account statements, invitations to obtain a transfer of balances.
- Processing a card to transfer your balance: in the market, there are different plastics that offer the main benefit balance transfers, which simplify things for users who want to reduce the interest they are paying.
Steps to request a transfer of balances:
- Request your new card (to which you will transfer the balance): take into account that you must comply with each requirement of the new plastic.
- Check your new line of credit: if this is less than your debt to the other bank, request a reconsideration mentioning that you wish to make a transfer of balances.
- Ask the institution for the transfer: call the bank to request the movement to pay for your “old card”.
- Continue paying the debt on your “old card”: after requesting the transfer, ask how much your balance will be reflected in zeros, as each bank contemplates different periods.
- Concentrate on paying: the transferred debt will be divided into fixed payments, if you fail in any, your monthly payment will be part of the revolving balance and the regular rate of the card will apply. Avoid it at all costs.
2.- Personal or payroll credit
As you are already imagining, with a personal or payroll loan, the objective is to request a loan to pay the debts you have (either credit cards or other financing that you have not yet paid).
If Alejandro opted for this alternative, what he would do would be to stop having three debts on three different credit cards, and now worry about paying a single bank the same debt.
But what are a personal credit and a payroll?
A payroll loan is a loan whose biweekly or monthly payment is obtained by the grantor from your payroll account. This means that if the monthly payment is 3,000 pesos, this amount will be deducted automatically from what you receive in your payroll account.
On the other hand, a personal credit is practically the same, with the difference that the payment is not linked to a payroll account, so you will not automatically be deducted from what you receive from salary.
Why are they a good option to consolidate your debts?
- Because they do not have a specific purpose, so you can use them for whatever you want without having to be alerting the grantor, something that does not happen, for example, with an auto loan.
- Because if you use them to pay your debts, you will almost be carrying out a balance transfer, because in the end what you will do is consolidate your debt and pay it at a more attractive interest rate.
- Because the procedure to obtain them is really agile, because the bank has sufficient elements to verify your data and carry out a credit analysis.
What do you need to apply for one of these credits?
- Although the requirements of each grantor may have some variants, you will usually need to comply with this:
- Receive your payroll or have a savings account at the bank where you plan to apply for your credit.
- Be of legal age and have valid official identification.
- Have an active account, either payroll or debit, with six months old.
- Proof of address and proof of income over 2,000 pesos per month.
Advantages of consolidating your debts:
- You combine several payments in one. This will allow you to organize yourself better, in addition to the convenience of making a single payment at the same institution.
- You will get a lower interest. The vast majority of options to consolidate your debt, either a personal loan or a line of credit, offer you much more convenient interests.
- You reduce monthly payments. If the interest on your new loan is lower, it is very possible that your monthly payment is also lower. In addition to that if you pay in time and form you will avoid commissions for delay or delinquency.
Disadvantages of consolidating debts
- It could cost you more money. In spite of obtaining an interest and reduced payments, if the repayment period is extensive, at the end of the life of the loan you may end up paying more.
- You could borrow more. Either by necessity or by will, if you reuse the cards you already paid, you would face paying the original debt plus any new debt.
- Negative effects on your Score. Consolidating debts can affect your score by changing the use of your credit.
Make the right decision
Although consolidating a debt is one of the options that are at your disposal, we recommend you follow these tips so that you always keep an order in your expenses and never see yourself compromised.
- Do not risk with purchases that will put your economy at risk or that you know will demand maximum efforts to be paid.
- If you already have a debt, commit to finishing paying it before making another expense.
- If you drive a credit card, make good use of the months without interest, they are a very useful tool to pay in installments.