Three myths about debt consolidation

There are many myths about debt consolidation and consumers must be careful to check their facts before they decide to put all their debts in one basket. Done right, it can lead to better control and financial relief for consumers.

“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 it is and what it is not to ensure that consumers can maximise its benefits,” Alpheus Legodi, head of FNB loan products, says.

Legodi demystifies these three myths about debt consolidation:

• Debt consolidation will hurt your credit score: There will be an initial credit bureau inquiry on your credit report but over the longer term debt consolidation could help improve your credit score as 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. With debt consolidation, you will not be listed and are permitted to apply for more credit if you can afford to.
• Debt consolidation automatically decreases your debt: You can benefit from monthly cashflow unlock from the term extension but you are still required to repay the full outstanding amount you owe.

ALSO READ: What you need to know about personal loans

Debt consolidation is effective money management tool

“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, Legodi says, it does not 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 this option to consolidate your debt.

“As FNB, we offer 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.”

Legodi warns that consumers must ensure they use credit responsibly and only use credit from reputable and authorised financial service providers.