Consolidating Credit Card Debt? Read This
Challenging economic times call for creative measures regarding debt management and, in particular, credit card debt consolidation. When faced with having to pay considerably more on interest than the original price of any goods or services purchased, most opt to pay off existing debt.
As with any debt management plan, there are several aspects to consider when evaluating the pros and cons of credit card debt consolidation as a form of credit relief. Although consolidating debt is an effective form of debt relief for some, others opt for alternative options like filing for bankruptcy.
Three Ways to Consolidate Credit Card Debt
Three popular ways to consolidate credit card debt include:
- Debt Management or Settlement Plans. Those opting for this form of credit relief enroll in a debt management or debt settlement program to help work out a consolidation plan. These are particularly useful options for those with credit card debt that has gotten out of hand, or those who feel they will do best implementing a debt consolidation plan presented by a third party credit expert.
- Taking Out Another, Lower Interest Credit Card. Those able to set and follow stricter personal financial goals may decide to consolidate credit card debt by taking out another, lower interest credit card with which to pay off the original debt or debts. This, of course, may become a slippery slope, compounding debt further for those unable to stick to a stricter financial budget.
- Debt Consolidation Loans. Yet another option is to relieve credit card debt by taking out another loan, particularly an additional mortgage on a home. The benefit here is that such loans have lower interest rates than credit cards. However, these loans are longer term, meaning the debt will be paid off over a longer period of time. Moreover, this option obviously requires that the interested party own a home.
In addition to understanding the options available for consolidating debt, it is also helpful to weigh the pros and cons of doing so.
Benefits of Credit Card Debt Consolidation
- A Single, Manageable Monthly Payment. One of the greatest advantages of consolidating credit card debt has to do with lowering the monthly payments required for debt relief. Paying off credit card debt through lower monthly payments also allows individuals to get back on track toward a healthy credit rating. Plus, having just one payment to worry about each month can, in itself, be a relief. It’s far easier to remember to make a single payment than to have to balance multiple monthly payments.
- Faster Debt Relief. Debt consolidation also means that any debt will be paid off more quickly because it’s easier to make the smaller monthly payment permitted by debt settlement plans. This, in turn, leads to multiple benefits. For example, the sooner the debt is paid off, the sooner interest stops accruing on that debt. Simply eliminating interest can save a considerable amount of money. Moreover, the quicker the credit card debt is paid off, the sooner individuals can start working on improving their credit score.
- Learned Discipline. By participating in a debt consolidation program, opting for a debt settlement plan, or deciding to pay off debt using a lower interest credit card, those with low credit ratings learn to approach their expenses in a more disciplined manner. Forming new, more financially responsible habits can help eliminate credit card debt in the future.
Drawbacks of Credit Card Debt Consolidation
- Debt Management Program Costs. While enrolling in a debt management program may be helpful in terms of debt consolidation, many credit relief companies charge fees for their services, adding to the already considerable financial burden of debt and interest. These fees are generally a small percentage of the overall “debt consolidation package”, which still results in significant savings from the original debt amount.
- Paying With Another Credit Card. While on the surface this may seem like a viable alternative, some credit card companies offer low introductory interest rates that increase later on. Moreover, the Credit Card Act of 2009 permits credit card companies to impose drastically higher interest rates if card holders miss even one payment.
- Debt Consolidation Loans. Taking out another mortgage to pay off credit card debt may offer some relief by permitting payment over a longer period of time. However, failure to continue to make mortgage payments may result in foreclosure.
Evaluate all of the Debt Relief Possibilities
While there are several options available for those looking to consolidate their credit card debt, the best approach is to evaluate the possibilities and consider the drawbacks associated with each credit relief tactic. The best option will be the one that balances debt relief with the fewest, or the least detrimental, drawbacks.