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Given everything going on right now, it’s hardly a surprise that many people in the UK are looking at their debt situation and thinking about how to manage it.  Debt consolidation may be an option for some people.  It is, however, important to think about the situation carefully before you decide whether or not to consolidate.  If you do decide to consolidate, it’s important to choose the right option for you.

Look at whether you can improve your credit rating

Bluntly, your credit rating is a very accurate indicator of how much lenders and service providers are likely to value your custom.  You, therefore, want to do anything and everything you can to make it as good as possible before you apply for a new financial product.

This is particularly true when it comes to debt consolidation.  The key point to understand is that the amount of interest you pay on a credit product depends partly on the interest-rate charged and partly on the length of the loan.  In other words, even if you consolidate your debts into a lower-interest product, you could still wind up paying more than you would if you had left them where they were.

If at all possible, therefore, you want to consolidate debts onto a product which, at the very least, will leave you no worse off than you are now.  Ideally, it should leave you better off.  The way to make this happen is to polish up your credit record and do your research very thoroughly before you sign up to a new credit product.

Analyse your debt situation

First of all, make a full and detailed record of all the debts you currently have.  Then look at all your options for paying them back.  Remember to include the option of renegotiating with your current lender.  If you are a very good customer, they may want to keep you.  If, on the other hand, you are in financial difficulties, then they are under an obligation to help you.

Asking your lender to show forbearance will generally require you to show that you can’t pay (at least at your current interest rate) rather than that you won’t pay.  This may sound like a challenging process, but actually, it’s pretty similar to the process for applying for a credit product.  Basically, you show your incomings and outgoings and explain why you need your lender’s help.  If they agree with you, they reduce the rate.  This could ultimately leave you much better off than consolidating.

Stay open to the possibility of using different approaches for different debts.  For example, if you have a lot of debt spread over various credit cards, you might want to consolidate the cards with the larger balances.  Then you can use the money you save each month to pay extra towards the cards with the smaller balances so that you pay them off as quickly as possible.

If you do consolidate, use the right product

If you only have a small amount of credit-/store-card debt and a decent credit record, you might still be able to do a balance transfer.  If, however, you’re looking at larger amounts of debt and/or know you’ll need longer to pay it off, then a loan is probably going to be the only way to go.

Be very careful to work out how much interest you will pay in total and see how that compares to your current situation.  In particular, think about whether or not you could make a push to reduce your debt and improve your credit record so that you qualify for a better deal a bit further down the line.

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