How to consolidate your credit card debt
If you’ve racked up a lot of credit card debt on several different cards, you know it can be difficult to keep track of them all. Not only does each card have a different expiration date, but they probably all have different interest rates, too.
Is it worth it to simplify the process of paying off your credit card by taking out a debt consolidation loan? While it can be nice to only have one bill to pay each month, there are a few big caveats to consider. Let’s look at scenarios where this can help you consolidate your debt, as well as a few cases where it won’t do you much good.
When Debt Consolidation Loans Make No Sense
In most cases, debt consolidation loans don’t make sense. They are certainly attractive: the attraction of being able to pay off all your credit cards is strong, especially in exchange for a single monthly payment to your bank or credit union at a lower interest rate. It’s certainly a tantalizing opportunity, but it’s not perfect. Remember, debt consolidation loans are financial products, which means financial institutions wouldn’t offer them to you if they didn’t make money with them.
Check your interest rates and repayment plan
Figure out how long it would take you to pay off all of your credit cards at your current payment rate. Compare that to the length of the consolidation loan you are considering taking out. Your average five-year (60-month) debt consolidation loan, even at a lower interest rate than your credit card, can cost more in the long run than if you just paid off your cards faster.
You can usually pay off your loan faster without a penalty, but it’s easy to get into the habit of paying the minimum required each month out of laziness.
Compare this plan to what a loan would offer
Check out what your monthly payment would be on a debt consolidation loan.
Are you paying at least that much for your credit cards now? If your loan repayment is more than what you pay for your debts – and it’s within your budget – it might be time to step up and put more money on your credit cards. .
Think about your behavior
Once your cards and debts are paid off, are you going to cancel the credit cards? Of course, you get credit cards with pretty zeros on your monthly bill in exchange for putting your balances on your consolidation loan.
But one of the biggest problems with debt consolidation loans is that they do nothing to change the behaviors that got you into debt in the first place. Instead, they add another creditor to your stack and fan the flames of debt to pay off more debt.
If you have any suspicion that you might be tempted to use these cards again after paying them off, or if you are using debt consolidation as an easy way to avoid really staring at your budget, you don’t. for you.
The last thing you want is to take out a loan, pay off your cards, and then top up your cards again. It does nothing but dig your hole twice as deep.
When Debt Consolidation Loans Are a Good Idea
Despite all these caveats, it are a few circumstances that make the consolidation loan a good idea.
If you drown in debt
If your debt load and the high interest rates on your credit card are overwhelming you, a consolidation loan can help you feel more in control. The rates for debt consolidation loans can be as low as 4-7% if you have good credit, depending on ValuePenguin. If the interest rate on your credit card is two or three times higher, you’ll see a noticeable difference in how quickly you can make progress on paying off your debt.
If you have enough cash
A debt consolidation loan will give you a fixed payment each month to make sure you pay off the entire balance during the life of the loan. It’s great if you have a reliable cash flow to pay that amount every month.
If you have had your credit accounts for several years, you have a better chance of working with these issuers if you have a problem making your payments. You can use your longer history with this transmitter to your advantage if you have a problem. Some credit card issuers also have difficulty programs they can put you in trouble if you have a temporary cash flow problem, such as a lack of employment.
If you are confident that you will have sufficient income to be able to make the required payments throughout the life of the loan, you might be a good candidate for a debt consolidation loan.
If you still feel stuck, ask for help
It might seem like a good idea to just take a big loan, pay everyone off, and only process that one monthly payment, but all you do is pay a financial institution to do something for you that you can. do on your own. It feels good not to receive a bunch of bills in the mail or worry about who you pay when and for how much, but you can do the same yourself:
Yet even if the calculation of a debt consolidation loan works in your favor, your behavior may be the real problem. Paying off all your credit cards and debt with a loan just mixes up the lounge chairs – you still owe money that you have to pay off, and if you start to top up those freshly paid credit cards again, those lounge chairs can do it all. you might as well be on the Titanic.
Make no mistake: if you want debt settlement help, you should get it. Don’t let social stigma or ego get in your way – there are plenty of ways to get started that go beyond blogging and don’t put you in debt again. Debt repayment and credit counseling programs can negotiate lower interest rates on your behalf or help you do it yourself.
Debt counselors can help you with your budget and help you plan for a debt exit that turns your credit into a tool you control, as opposed to a monster that controls you. If you need help, get it – and definitely do it before you take out a loan.
This article was originally published in 2013 and was updated in February 2019 with additional information.