Credit Card Debt Consolidation

/ BY / Managing Debt

You've probably seen commercials or ads about credit card debt consolidation offers that promise to roll your credit card debt into one low payment. But while this may sound like an easy fix to your credit card woes, it's important to understand what debt consolidation entails before considering it seriously.

What is credit card debt consolidation?

Credit card debt consolidation works by taking out a loan, typically a home equity line of credit or a loan from a consolidation firm, and using that loan to pay off all of your credit cards. From there, you simply make one payment to whoever issued the line of credit, either the bank or the debt consolidation company. In most cases, the interest rates are lower than the interest rates from credit cards, which can reach 29% or more.

Benefits of credit card debt consolidation

  • Convenience. This is perhaps the biggest benefit of debt consolidation, particularly if you have multiple lines of credit and are making payments to a number of different companies. One payment also makes it less likely to miss or skip payments.
  • Savings. Minimum payments on multiple credit cards can add up into the hundreds, and finance charges are also costly. One payment and one interest rate can result in potentially significant savings each month.
  • Fresh start. Using a loan to pay off credit cards can offer a fresh start to those who feel swallowed up in debt. Having one creditor instead of dozens can also provide psychological benefits and make you feel more in control of your finances.

Dangers of credit card debt consolidation

If credit card debt consolidation sounds like it's too good to be true, in some cases it may be. Some of the drawbacks of it include:

  • Not a permanent fix. If your spending is out of control and your credit card debt is the result of poor money management, debt consolidation will only act as a band-aid for a much bigger problem. To truly become debt-free and take control of your finances, you need to get to the root of the problem and learn budgeting and money management.
  • Savings aren't guaranteed. In some cases, you can save a lot of money. However, if you have poor credit or no collateral, you'll be given a much higher interest rate on your debt consolidation loan. Additionally, defaulting on the loan could cause you to lose your home or drive you further into debt.
  • Scams abound. There are many unscrupulous debt consolidation companies that can cause you to incur even more debt or end up paying ridiculously high interest rates.

Finding a debt consolidation company

If you think debt consolidation is for you, be sure to do your homework first before deciding on a company. Do extensive research online by reading reviews and checking Better Business Bureau ratings. Stay away from any company that pressures you to make a decision.

You should also make sure your creditors will actually work with a debt consolidation company; some companies refuse to work with them, so you may not be getting the savings or convenience you hoped for.

Bottom Line

If you have high interest credit cards and find that the majority of your monthly budget is swallowed up by payments, then credit card debt consolidation may be a good way to better manage your finances and save some money on interest in the process.

For credit card debt consolidation to be successful, you must have discipline in order to prevent additional credit card problems from happening. If you do opt for debt consolidation, make sure you manage your spending and avoid opening up new lines of credit.

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Please note your financial situation is unique and our tips & advice presented here may not be appropriate for your situation. CreditCardXpo.com recommends that you seek different advice & opinions from your own accountant or financial adviser who understands your individual circumstances before making any important decisions or implementing any financial strategy.