Credit card debt consolidation seems like a very good idea. Who does not like to simplify their credit situation so they are left with only one debt to pay each month? And who will not grab the opportunity to get rid of the high-interest on their credit card debt? Sometimes, the debt itself is affordable. But when you factor in the high-interest rate and other fees associated with credit cards, it starts to become too expensive for your budget.
This scenario makes debt consolidation a tempting solution for your credit situation. The truth is, it can be the perfect way for you to get out of debt. However, you need to analyze your specific debt and financial situation before you finalize your decision.
What does credit card debt consolidation mean?
Let us define what credit card debt consolidation is all about.
This is a debt solution that allows you to restructure your multiple debts. As the name suggests, you will combine your different credit card balances. The goal is to end up with a new repayment plan that will make it easier for you to meet your monthly payments. Most of the time, you will be left with one monthly payment. This is usually an amount that your budget can easily afford.
Take note that this debt solution will not pay your credit card debts. After consolidating, you still owe the same amount of money. Sometimes, you could end up owing more – especially if there are fees involved in the consolidation process. This is only a minimal fee so it is really nothing to worry about. The bottom line here is that you still have to make payments and oftentimes, you still have a long way to go before you complete them.
While it is not a guarantee, this debt relief program will try to lower your interest rate. How it is done will depend on how you choose to consolidate your credit card balance. If you want to use balance transfer or debt consolidation loan, you need to have a good credit score so you can get a low-interest rate. But if you plan to use debt management, the credit counselor will try to negotiate on your behalf. The decision will be entirely up to the creditor but this is the only way that you can hope to lower your interest rate.
When you consolidate your credit card debt, it is best for you to come up with a fixed monthly repayment – even for balance transfer. Not only that, you should aim to get the shortest repayment period. This will require a higher monthly payment but it will help you save money in the long run. Of course, if you cannot afford it, then go for a lower monthly payment. It will take you longer to completely pay off your credit card balance and will probably cost you more. But if that is what your finances can afford, then you need to be honest about it.
The best thing about consolidating all your credit card debt is that it will help you boost your credit score. As long as you follow the repayment plan of the debt consolidation, then you should be fine and on your way to completely paying off your credit card debts.
Pros and cons of consolidating credit card debts
There are a couple of advantages and disadvantages when it comes to consolidating credit card debt. Let us start with the advantages.
Pros of consolidating credit card debts
- It simplifies your monthly debt payments. Instead of monitoring multiple debts, you will end up with only one monthly payment each month. This can simplify your payments and will make monitoring easier to accomplish. The chances that you will be late or skip a payment will be lower.
- It gives you the opportunity to improve your payment terms. As you take on a new strategy to pay off your multiple debts, you are given a chance to restructure your payments according to your financial capabilities. This is your chance to remove the unnecessary fees. Or you can choose to lengthen your payment terms so you will be left with a lower monthly requirement. That should give you some breathing space in your budget. You can also take this chance to save money by increasing your monthly payments so you can shorten your payment terms. This will help you save money on the interest that you could have paid on the loan as a whole.
- It allows you to pursue lower interest rates. Credit cards are notorious for having high-interest rates. Consolidating will give you the chance to lower it. As mentioned, you either need a good credit score or hire a great credit counselor to make this possible.
- It can force you to stop using your cards. At least, this is true if you are using debt management. Once the Debt Management Plan (DMP) is approved by the creditors and implemented by the credit counselor, your credit cards will be frozen. This will be evident in your credit report. This is actually a good thing because you will be forced to stop using credit while you are paying off your current balance.
All of these make credit card consolidation an appealing option to get out of debt. But before you decide, here are some of the reasons why this may not be a good option.
Cons of consolidating credit card debts
- It does not solve the real problem. While debt consolidation can restructure your payments and make things simpler, it will not really solve the real issue. You need to identify the reason why you have so much credit card debt in the first place. Whether it is because of an impulsive buying habit or a lack of emergency funds, you need to make sure that you will never land in the same credit situation again.
- It can make you feel complacent. Another pitfall of debt consolidation is it will make you feel a false sense of complacency. You will feel like you have paid off all your credit card debts – but in truth, you just restructured your debts. You still owe the same amount of money and you still have to pay it back.
- It can tempt you to use more credit. Since you are feeling a false sense of complacency, you might be tempted to use more credit. For instance, if you used a loan to pay off all your credit card balances, that would leave you with a huge amount of loan and a couple of card with zero balance. That might be tempting to use the next time you go to a retail or grocery store. Do not give in to the temptation because if you do, you might end up with more debt than when you started.
- It might cost you more in the long run. Sometimes, people focus too much on the lower monthly payment. While this will give you some space in your monthly budget, it might cost you more in the long run. Even if you can get a lower interest rate, you will still end up paying more because your payment terms will be longer.
Consider these pros and cons before you decide if you will pursue credit card consolidation.
What are the options to consolidate credit card debt?
If you are certain that you want to use this debt relief option, you need to understand the different options that you have. There are 4 ways that you can consolidate credit card debts.
Balance transfer. This option involves another credit card. This is usually offered with a very low or zero percent interest rate. When you transfer your credit card balance in this card, you will be charged a balance transfer fee. Once you have transferred all the eligible debts, it is advised that you maximize your payments. The low-interest rate is only available for a short period – usually a couple of months. During this time, most of your payments will go to the principal balance. This will help you aggressively pay off your debts.
Debt management. Another option that you have is debt management. This is when you get the help of a credit counselor. Together, you will analyze your debt and financial situation so you can identify what you did wrong, and the best repayment plan that will suit your finances. This repayment plan will be called the DMP (Debt Management Plan). The credit counselor will present this to your creditors. If they approve, you need to send one monthly payment to the counselor. They will take charge of distributing your payment to the different creditors.
Debt consolidation loan. The third option is getting an unsecured loan that will help you pay off all your credit card debts. This will end up giving you one big loan and multiple credit cards with zero balance. Before you choose this option, make sure you have a high credit score. This will help you get approval for a low-interest loan.
Home equity loan. The final option to consolidate debt is to use the equity in your home. A lender will loan you an amount based on the equity of your home. Since this loan has collateral (your home), you can expect it to have a much lower interest rate compared to your credit card debts. Of course, you need to be careful in meeting all your payments because failure to pay back this loan could put your home in danger.
In case all of these options are confusing, you can always get the help of a professional. They can give you great advice on what debt consolidation strategy suits your specific financial situation. Find out more details with #1 debt consolidation company – www.nationaldebtrelief.com.
How to choose the right way to consolidate multiple credit card debts
Choosing the right debt consolidation strategy is important if you want to avoid wasting your time, money, and effort in getting out of your credit card problems. Fortunately, education is the best way to make a smart decision about your debt relief option. There are a couple of things that you need to know if you want to choose the perfect way to get out of debt.
- Know your options. Start by knowing your options. As mentioned, you have a couple of options before you. All of these will consolidate your credit card debt but a lot of details will differ from each other. Knowing these details will help you decide the best way to consolidate your debt based on your unique debt and financial situation.
- Know your debts. Once you know your options, it is important to understand the type of debts that you owe. Take note of the interest rates, due dates, balance, and the terms and conditions of the loan. You want to make sure that the new terms of the restructured debt will be better than what you currently have. If you have a lot of high-interest rate cards, a home equity loan can significantly reduce your monthly payments.
- Know your budget. After studying your debts, it is time to define your budget. Take a look at your budget plan. If you do not have a plan, it is the perfect time to start making one. Through this plan, you will have a better idea of how much you can afford as your monthly debt payment. This is very important in determining how you will restructure your debts through consolidation. For instance, if you know that you cannot afford to pay off everything that you owe, then you may need debt reduction and not just consolidation.
- Know your credit score. At this point, you should have narrowed your options based on your debts and financial situation. Your credit score will help thin out the list even further. Some of the debt consolidation options require a good credit score – like debt consolidation loan and home equity loans. But if you have a bad credit score, debt management may be the best option.
- Know your financial goals. The final consideration involves your financial goals. For instance, if you want to borrow money to buy a house or a new car, then you need a good credit score for that. You should choose a consolidation strategy that will not compromise your credit standing.
Once you have chosen the right debt consolidation program, make sure you give yourself options. You can start with toptenreviews.com on debt consolidation companies. This website can give you insight when it comes to the best companies that you can consider for debt management – or even debt consolidation loans. You can read about the criteria that make a company a good choice. The list of companies on the site should be a great place to start your research. Look at these companies but do not rely on this site entirely when you make your decision. Conduct a more thorough research just to make sure.
Can credit card debt consolidation reduce your debts?
The answer to this is yes. But is will not be called debt consolidation anymore. It will now be called debt settlement.
This is a debt solution that will give you the chance to reduce your credit card debt. It involves negotiating with your creditors to allow you to pay a portion of what you owe. It is like paying pennies for every dollar of your debt. For instance, if you have a total of $10,000, you will negotiate with the creditor to pay only $7,000. Once you have paid that off, the remaining $3,000 will be forgiven.
The challenge here is how will you get the creditor to agree?
Some people will use financial hardship as an excuse. If you cannot afford to pay off your loan, you might be forced to declare bankruptcy. When this happens, it is the credit card companies that are usually last to be paid off. There are cases wherein they are not paid anything and the balance ends up being discharged. The creditor would want to avoid that scenario. This is why debt settlement might be acceptable.
Of course, you need to have the lump sum amount that you will use as the settlement money. This is the amount that you will use to negotiate with the creditor. You want them to accept this – like an all or nothing offer. Depending on how good you are with negotiating, you might be able to settle your debts for much less than what you really owe.
In case you think that the negotiation is too intimidating, you might want to hire a professional to help you out. There are many legitimate and reliable debt settlement companies that you can turn to for help.