Debt consolidation allows consumers to consolidate their debt held with various credit providers into one manageable debt that they can pay off. Debt consolidation can lead to better control and financial relief for the consumer.
Alpheus Legodi, FNB Loans Product Head, says, “If used correctly, debt consolidation can be a powerful money management tool for consumers as it also helps them to avoid dealing with numerous creditors who charge varied interest rates.
“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:
- Debt consolidation will hurt your credit score: There will be an initial bureau inquiry on your credit report; however, over the longer-term debt consolidation could help improve your credit score as you’ll 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; with debt consolidation, you will not be listed and are permitted to take further credit if you can afford to.
- Debt consolidation automatically decreases your debt: You can benefit from monthly cashflow unlock from the term extension; however, you are still required to repay the full outstanding amount you 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. However, it doesn’t take away the habit of knowing how to manage your money effectively. Consumers are advised to approach their financial institutions or advisors before choosing to go for debt consolidation,” Legodi added.
“As FNB, we offer Credit Switch as a solution to help customers consolidate their qualifying credit. We remind customers that if they consolidate their small unsecured credit products, such as store cards and micro loans, into one easy-to-manage loan with a single account fee and a personalised interest rate, it could reduce their monthly premiums and free up money to direct towards their other needs.
“We also caution all consumers to ensure responsible use of credit and only use credit from reputable and authorised financial service providers,” concludes Legodi.