Credit Card Debt Consolidation

Advice on how to eliminate credit card debt

The easiest way to understand credit card debt consolidation is to think of it as a single large loan that allows you to pay off a whole bunch of smaller debts. These loans simplify your credit debt repayment schedule, as you only have to manage a single monthly payment instead of multiple payments to numerous creditors.

You can use this big-loan strategy to eliminate credit card debt in a number of ways. Low-interest credit cards with high enough limits to cover all your existing debts may suffice if they allow you to transfer balances. Personal loans and home equity loans can also be used to generate the capital you need to cover all of your existing credit card debt.

Advantages of Credit Card Debt Consolidation

The primary advantage of credit card debt consolidation is that it gives consumers the opportunity to lower their overall monthly payments while paying down their debts at lower interest rates. This is because the minimum monthly payment that would be due on a large loan is usually less than the sum of the minimum payments due on each of your individual credit cards.

Over time, you can save money because you'll owe less in interest, and your credit rating will also improve if you manage the process correctly. If possible, choose to deal with a non-profit credit card debt consolidation company, as you'll get more advantageous terms on your loan.

Credit Card Debt Consolidation Risks

For all its advantages, debt consolidation carries risks. People who have the highest level of risk are those who ramp up their spending again because they suddenly have more money free at the end of the month. These consumers are in danger of falling into credit card debt all over again.

There are other things to watch for, too. Generally, consolidation loans require you to convert unsecured debt into secured debt. You'll have to offer collateral, which you stand to lose if you default. This is not the case if you just keep things as they are and pay down your credit cards one by one.

You also need to watch for teaser interest rates if you're transferring all your balances onto a single high-limit credit card. These low rates are often only in effect for a few months, after which the interest rates rise dramatically, so unless you're going to have your debt paid off before this increase happens, you could end up actually paying more in the long run. Some loans also offer low monthly payments but charge very high interest rates over longer repayment periods, giving you the illusion of saving money even though you actually spend thousands more dollars over the life of the loan.

Finally, while consolidation can help , it can also hurt it. One of the most important determining factors in your credit score is your debt-to-limit ratio; the closer your overall debt is to your overall credit limit, the lower can fall. So, maxing out one high-limit credit card can actually be worse than owing a little bit on lots of lower-limit cards. In any case, it's vital for you to do all the math before you sign anything.