Many of us these days have debts to settle. We use multiple credit cards, we borrow money to buy a car, and then we also get a mortgage to pay for our dream home. That’s a lot debt to handle, and sometimes it can be difficult to make payments on time.
Part of the problem is that with so many credit card debts we need to pay off, keeping track of how much we need to pay and when can be a real hassle. And that’s where credit card debt consolidation comes in.
The Benefits of Credit Card Debt Consolidation
With credit card consolidation, you make things a lot simpler just by taking out a bigger loan to pay off all the other smaller loans. This loan can be obtained from a bank or credit union, or it can come from another credit card company.
With credit card debt consolidation you will only need to make a single loan payment each month, which is much more convenient for you. It’s easier to track, and the loan payments can be made continuously until you pay it all off.
Another potential advantage of consolidation is it gives you the ability to pare down the amount of interest you pay month after month. Some credit card companies offer very low interest rates, and others even offer zero interest rates for a certain period of time.
Finally, in the long run you may be able to improve your credit rating as you make your regular payments on time to your new lender.
Potential Drawbacks to Consolidation
Consolidation does have its disadvantages, however. The most immediate effect is a dip in your credit score, simply because you took out a new loan. Your credit utilization (the percentage of credit limit you’re currently using) when you had multiple credit cards may be very high if you’re close to the limit on all your cards. But after consolidating your debts, your credit utilization may now be at 100%.
If you’re having trouble managing your credit card debts, then consolidation can be a very useful tool. But often this also requires you to refrain from incurring any more debts. So from then on, you will have to get used to using cash for your purchases. For many of us, that’s not always easy.
Attractive low-interest rates may also stop being in effect if you simply forget to make a scheduled payment on time. Higher interest rates may also apply once the grace period ends for the zero interest rate. Essentially, you need to make sure you finish paying for all your credit card debts within this grace period.
Before you decide on credit card debt consolidation to help solve your credit card woes, you must first set a meeting with a debt counselor who can provide you with other options.
If you’re after the convenience of paying only a single lender, just make sure you can make the payments on time. Consolidation always looks good on paper, but missing your payments even once can have harrowing consequences.