Debt consolidation turns out to be a blessing for a person under debt. Under debt consolidation, the debtor combines all his/her debts (like personal loan, credit card bills, student loan, medical bills, etc.) and settling them against a new loan. The new loan taken tends to have more favorable terms like tenure, interest rate, etc. The debts are paid off by using the amount received from the new loan.
Debt consolidation can be used to pay off unsecured debts. It turns out to be very beneficial as it reduces the number of monthly payments, lowers the interest rate, etc.
The invention of credit cards has turned out to be one of the major breakthroughs in the financial sector. Nowadays, most of us prefer credit cards over cash payments. Many people even have more than one credit card. Things take a different turn when we start falling behind on payments. This results in multiple credit card debts. People facing multiple credit card debt often think about going for debt consolidation. Well, the question arises, whether you should actually go for it?
Consolidating credit card debt has its advantages, as well as disadvantages. In this article, we have tried to cover both sides of Debt consolidation. This might help you in making a more appropriate decision.
Dangers of Debt Consolidation
Though debt consolidation looks like one of the best possible solutions for settling multiple credit card debts, it too has numerous risks associated with it. They are:
Many credit card companies offer lower or no interest rates for a limited period. Once the introductory period gets over, the debtor has to pay the normal interest rate on the amount taken. As a result, you might end up paying more interest than your original debt. It is important to read the documents and the debt consolidation terms in detail before making a final decision.
Even if you pay off your existing credit card debts, you still need to pay monthly payments for the new loan taken. In case you are facing financial crises, then chances of you getting trapped in the earlier situation (debt) are quite higher. Any failure or delay in payment may put you in trouble.
Depending on the debt consolidation option selected, you might end up paying more in the long run as compared to if you would have continued paying monthly payments of your original debts. Before selecting an option, you should compare the total amount you end up paying in both cases.
An individual with a below-average or poor credit might not get a good deal, as far as, debt-consolidation option. Financial institutions and other lenders do a thorough “background check” for all the applicants.
This means before you start considering debt consolidation options, you should consider all the possible options, as far as debt pay-off is considered.
The Rewards of Credit Card Consolidation
Now that you know the risk involved in debt consolidation let us talk about the benefits of credit card debt consolidation.
In debt consolidation, your multiple payments are replaced by a single monthly payment. Managing multiple payments can be quite difficult. Any mismanagement and you might miss an important payment deadline. On the other hand, in debt consolidation, you just have to remember the payment details of a single loan.
If you take your time and do a thorough market research of all the debt consolidation options, you might get lucky and find an option with a much lower interest rate. This way, you will end up saving a significant amount in terms of interest as compared to original consolidated debts.
One of the major disadvantages of using multiple credit cards is that we fail to keep track of the total amount spend until we get our monthly statements. As a result, we end up spending more than what we can pay. In debt consolidation, all of our debts come under one head. This makes debt monitoring a lot easier, which would further motivate us to avoid overspending.
Debt Consolidation That Can Work
Some of the debt consolidation options that can be helpful in paying-off debt are
Work with a non-profit credit counseling organization
Based on your current financial situation, a credit counseling organization formulate a plan to pay off your debts. They offer guidance on finance-related issues like budgeting, debt management, etc.
Balance transfer credit card
In this, you can consolidate all your credit card bills and settle them against an existing or a new credit card. Many companies give an offer of 0% interest on the balance transferred when paid under the given time.
Home Equity Loan
As the name suggests, you can take a loan against your home equity. You can use the loan amount to pay off your debts.
You can even apply for a personal loan to pay off consolidated credit card debt.
Another option under credit card debt consolidation is that you can take a loan from your family member, friend, associate, or any relative. You can use this money to clear your outstanding credit card bills.
The Bottom Line
Consolidating all your credit card bills and paying them off seems to be a good solution. But, you need to sit and analyze your income-expenditure ratio. It would help if you found the root cause of the debt. Once you identify the real issue, start working on it, so that you don’t have to face this issue again.
Focused on providing information for anyone in need of debt relief, Jackson writes a blog on debt settlement, debt consolidation, tax debt relief and student loan debt which helps to find the debt solution that fits their unique needs no matter the amount of debt they are in.