When you’re buried in debt, consolidation might seem like an easy way out. It presents a simplified method to manage your credit card bills: Instead of writing several checks to multiple creditors, one automatic and manageable payment will be deducted from your account every month. But is debt consolidation right for you? While these services are useful, there are a couple of caveats that you must be aware of.
Consider the pros and cons of debt consolidation and decide if it’s right for you.
When Debt Consolidation Loans Don’t Make Sense
In most cases, debt consolidation loans are pointless. The lure of paying off all your credit cards might be a strong one, especially if you’re sold on the idea of making a single monthly payment to your bank. But while the opportunity could spare you a lot of grief, it’s not as picture perfect as you’d like it to be.
Debt consolidation agencies are not charitable organizations. Like any business, their goal is to earn a profit, and if you’re not careful you could fall head first into a consolidation trap. Here are some tips to ensure that your deal doesn’t go sour.
Do the math. Add up your credit card balances and the accompanying interest rate to determine how long it would take you to repay the debt at your current rate. Compare your numbers to the length and total payments on your debt consolidation loan. You might be surprised at the numbers. Even with a lower interest rate, you might end up paying more over the length of your loan – usually 5 years.
Compare your monthly payments. What would your monthly payment on your loan be? If it’s about the same or more than you’re paying towards your credit cards, you might as well up the ante and use that money to pay down your credit card balances. If the loan payment is less than your combined credit card payments, you’ll end up paying more interest in the long run.
Will you cancel your existing credit cards? The loan will clear off your credit cards – that’s an exciting prospect. But debt consolidation won’t fix your behavior towards debt. It adds another creditor on your financial profile, and the available balance on your credit cards could entice you into more debt.
Debt consolidation loans are not right for you if you’re using them as an easy way out of debt. You’ll end up in a lot more difficulties if you take out a huge loan to pay off your cards and then max out the cards again. Avoid these types of loans until you’ve changed your attitude towards credit.
When Debt Consolidation Loans Make Sense
If you’re drowning in debt with no chance of negotiating a lower interest rate with your lender, then debt or credit card consolidation may be right for you. But do the math to ensure that you come ahead.
It’s also helpful if high interest payments inflate your balances and make it impossible to keep up with the monthly payments. When used in conjunction with credit counseling and a debt repayment plan, debt consolidation can help you pay off all your debt for a fraction of the cost.
Examine Your Motives
If you’re truly serious about getting out of debt, you might be able to do for yourself what a debt consolidation company will do for you – without the added paperwork and costs.
Take an honest look at your debt and create a realistic household budget. Identify areas where you could cut costs, and use the savings to pay down the debt, starting with the highest interest credit card.
Even if debt consolidation will reduce the cost of your loans, your spending habits may be the real problem. If that’s the case, then you’re likely to fall right back into debt. So evaluate your motives for requesting debt consolidation and get help if you’re likely to have problems managing your finances.
So, debt consolidation is a legitimate tactic for dealing with debt – but only under the right circumstances. Consider the pros and cons and move forward only if you believe it’s the right fit for you.
Crystal Redhead-Gould appreciates that for many people consolidating their credit cards debts is a way to get their finances back on track. Discover more about debt consolidation using the free advice and information available on the uSwitch.com website.