Debt consolidation is a process that allows consumers to combine all of their debts that they have with different credit providers into one manageable debt that they can pay off.
Doing so can give consumers better control of their money and offer them financial relief.
Alpheus Legodi, FNB Loans Product Head, said that if debt consolidation is used correctly, it can be a powerful money management tool for consumers.
However, there is a need for more education on what debt consolidation is and isn’t to ensure that consumers can maximise its benefits.
Legodi demystifies three myths about debt consolidation so consumers can have a better understanding of the process.
Debt consolidation will hurt your credit score
There will be an initial bureau inquiry on your credit report, but in the long run, debt consolidation can help you improve your credit score because you will have more control over your credit commitments.
There will be an adverse listing on your credit report
Debt consolidation is often confused with debt review.
According to Charnel Collins, CEO of National Debt Advisors, debt review was designed to assist overindebted consumers by restructuring their debt into single and affordable monthly payments.
With debt consolidation, you will not be listed and are permitted to take further credit if you can afford to, unlike the debt review process, where you cannot apply for credit.
Debt consolidation automatically decreases your debt
According to Legodi, people can benefit from the monthly cash flow that will be available to them from the term extension. However, people are still required to repay the full outstanding amount that they owe.
"The high interest rate environment has affected the cashflow of many households, and debt consolidation is one of the most effective money management tools that can help customers free up monthly cashflow,“ Legodi said.
Legodi advises consumers to get help by approaching their financial institutions or speaking to advisers before they make the choice to go for debt consolidation.
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