There are a number of benefits to be derived from combining all of your unsecured debt into a single loan. You’ll have less bookkeeping to do, you’ll get a lower interest rate (if you choose carefully) and you’ll pay your debts off faster (again, if you choose carefully).
By now, you’ve probably surmised that what you need to know about credit card consolidation can be summed up in the phrase “if you choose carefully.”
What exactly does that mean though?
Read on to find out.
The Three Main Consolidation Methods
There are a number of different ways to accomplish credit card consolidation. The most frequently employed are a credit card balance transfer, a debt consolidation loan, or a debt management program.
Each has its advantages and disadvantages, as you’ll see below.
Credit Card Balance Transfer
You’ve no doubt seen these offers in your mailbox, touting zero percent introductory rates for a certain period of time, enabling you to pay off your existing balances without interest — as long as you pay off the transferred balance within the window provided.
The upside here, especially if you get some sort of a windfall that will let you eradicate that balance before the end of the introductory period, is you can kill your balance with no additional interest charges. However, it can be argued you wouldn’t need to consolidate if you were capable of paying off all of your credit card debt within that narrow timeframe.
What those deals don’t usually tell you in bold print is all of the interest that would have accrued from the date you took the deal gets added to your remaining balance if you don’t pay it all off by the cutoff date. There can also be annual fees and mandatory minimums to consider.
Debt Consolidation Loans
These generally take the form of a home equity line of credit, refinancing a property or taking out a personal loan. While you’ll need a good credit score to qualify for any of the above, you’ll need a very good credit score to get that personal loan, as it will usually be an unsecured instrument.
Meanwhile, home equity lines of credit and refinancing are secured by property you put up as collateral. This means you’ll agree to sell it and pay the lender out of the proceeds if you’re unable to repay the loan as agreed. In other words, with this form of credit card consolidation, you’ll trade unsecured credit card debt for secured debt that could cost you your home if things go south.
You’ll also encounter a number of associated fees with each of these loans.
Debt Management Programs
Unlike the two options above, you can usually get into a debt management program even if your credit score is a bit on the soft side. A credit counselor will work with your card issuers to get concessions on fees and interest to make your obligations easier to satisfy. Rather than pay your creditors directly, you’ll make payments to the management firm, which will disburse the cash to your card companies on your behalf.
The caveats here are all debt management companies aren’t on the up and up, so you’ll have to do some background checking to ensure you’re hooked up with a good one. You’ll also pay the fees for managing the accounts for you, as well as negotiating those fees and rate reductions.
Another thing you need to know about credit card consolidation is it doesn’t pay off your debt — it simply repackages it to make it easier to manage. You still owe the money, so you must also be careful not to go out and create new debt while you’re paying off the consolidation plan — otherwise, you’ll just make your situation worse.
One more thing: Always make sure whatever consolidation strategy you pursue results in a lower overall monthly payment, a lower overall interest rate and a shorter payoff term than you have with your existing debts.