How to Consolidate Credit Card Debt
If you have accumulated large amounts of debt on several different cards, you know that keeping track of them all can be difficult. Not only does each card have a different payment term – it is likely that everyone also has different interest rates.
Should you simplify your credit card payment process by taking out a debt consolidation loan? While it might be a good idea to pay just one bill each month, there are some pretty serious caveats. Let’s look at scenarios where it might help you consolidate your debt, as well as a few cases where it won’t do you much good.
When debt consolidation loans don’t make sense
In most cases, debt consolidation loans do not make sense. They are certainly attractive: the ability to pay off all your credit cards is very powerful, especially in exchange for a one-time monthly payment to your bank or credit union at a lower interest rate. It’s definitely a tempting opportunity, but it’s not perfect. Remember that debt consolidation loans are financial products, which means that financial institutions would not offer them to you if they did not receive money for them.
Check your interest rates and payment plan
Find out how long it will take for you to pay all your credit cards at the current rate. Compare this to the length of the consolidated loan you are about to take. Your average five-year (60-month) debt consolidation loan, even at a lower interest rate than your credit card, may be worth more in the long run than if you simply paid your cards off faster.
You can usually pay off your loan faster without a penalty, but it’s easy to get used to just paying off the minimum required every month out of laziness.
Compare this plan with what the loan offers
Check what your monthly debt consolidation loan payment will be.
Are you paying at least that much with credit cards now? If your loan payment exceeds the amount you pay to pay off your debts – and it fits your budget – it might be time to raise your rate and just put more money on your credit cards.
Think about your behavior
Once your cards and debts are paid off, will you give up credit cards? Of course, you get credit cards with nice zeros in your monthly bill in exchange for putting the balance on a consolidated loan.
But one of the biggest problems with debt consolidation loans is that they don’t do anything to change the behavior that drove you into debt in the first place. Instead, they add another creditor to your pile and fan the debt incursion fire to pay off another debt.
If you suspect that you might be tempted to use these cards again after they have been paid off, or if you are using debt consolidation as an easy way out or a way to not look at your budget, this is not for you.
The last thing you need to do is take out a loan, pay off your cards, and then top up your accounts again. It does nothing but dig a hole twice as deep.
When Debt Consolidation Loans Are A Good Idea
Despite all these caveats, there are several circumstances that make loan consolidation a good idea.
If you’re drowning in debt
If you are overwhelmed by the amount of debt and high interest rates on your credit card, a consolidated loan can help you feel better. According to ValuePenguin, debt consolidation loan rates can be as low as 4-7% if you have good credit. If your credit card interest rate is two or three times higher, you will see a noticeable difference in how quickly you can pay off your debt.
If you have enough cash
A debt consolidation loan gives you a fixed payment every month to ensure that you pay off the entire balance over 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 credit accounts for several years, you will have a better chance of working with these issuers if you run into payment problems. You can use your longer history with this issuer to your advantage if you run into a problem. Some credit card issuers also have job placement programs that they can assign you if you are experiencing a temporary cash flow problem, such as a lack of jobs.
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 may be a good candidate for a debt consolidation loan.
If you still feel stuck, ask for help.
It might seem attractive to just take a good big loan, pay everyone off, and only deal with that monthly loan payment, but really all you really do is pay the financial institution to do something for you. what you can do on your own. It’s nice not to get a bunch of bills in the mail and not worry about who you pay, when and how much, but you can do the same yourself:
- Start by creating a realistic budget .
- Then decide if you want to pay first with the cards with the highest interest rate or the cards with the lowest balance .
- Set up automatic payments so you pay more than the minimum amount each month, paperless billing so you don’t receive invoices in the mail (although you should still check them every month), and let your money run you.
However, even if the math of a debt consolidation loan works in your favor, the real problem could be your behavior. Paying off all of your credit cards and debt with a loan just shuffles the sun loungers – you still owe money to pay, and if you start charging those newly paid credit cards again, those sun loungers could be on the Titanic as well .
Make no mistake: if you need help with debt, you must get it. Don’t let social stigma or ego get in your way – there are many ways to get back on track that go further than blog posts and won’t get you back into debt to someone else. Debt repayment and credit counseling programs can negotiate lower interest rates on your behalf or help you do it yourself.
Debt consultants can help you with your budget and help you plan a debt recovery path that turns your credit into an instrument that you control, not a monster that controls you. If you need help, get it – and be sure to do it before taking out a loan.
This post was originally published in 2013 and was updated with more information in February 2019.