What to Know Before You Consolidate Credit Card Debt
Should I consolidate my credit card debt?
Debtors often ask this question after realizing they’ll pay thousands in interest over numerous years as they pay off all their credit cards. In many instances, the interest paid will be greater than the cost of the original purchases. Someone in this situation may think it’s an easy choice to consolidate their debt if it means saving money and paying everything down sooner.
But, the real question should be: Am I prepared to consolidate credit card debt?
Preparing to Consolidate Credit Card Debt
There are a number of ways in which you can consolidate credit card debt. You can enroll in a debt management program, or a debt settlement plan if you’ve got unmanageable debt. Or you could choose to consolidate all your credit card debts onto a single, lower interest rate card.
All types of consolidation, require you to stop using the credit cards and make payments on time, either on your new loan, debt management plan, or dedicated account. If your situation is unstable, or you lack the discipline to budget well, consolidating credit card debt could backfire.
Are you ready to pay cash for everything and stick to a monthly budget? Paying late or missing a payment altogether could violate your consolidation agreement, meaning a much higher interest rate, extra fees, and a damaged credit score.
Advantages of Consolidating Credit Card Debt
Lower Monthly Payments
There are a number of benefits to consolidating credit card debt . The most important one being that when you consolidate credit card debt it gives you a more manageable monthly payment, and can lower your interest rate. This would mean paying thousands less, or in the case of negotiation, a smaller balance overall. With an option like a debt management plan you may also be able to get certain fees waived which helps make the debt more manageable.
Only One Payment to Make Each Month
The single payment can help you avoid late and missed payments, which would otherwise hike up interest and penalties. There’s also the issue of convenience. Instead of spending time managing multiple accounts you’ll only need to focus on a paying down a single debt.
Debt Free Sooner
A benefit that isn’t immediate, but no less important, is the fact that consolidating credit card debt can help you pay the debt off a lot sooner than you would have otherwise. Not only do you get the fulfillment of being debt free, but paying off your credit card debt sooner can also save you a lot of money. For every month that you’re having to pay credit card debt off you’re also having to pay interest.
Disadvantages of Consolidating Credit Card Debt
Even though the Federal Trade Commission has rules against it, some companies still charge up front fees just to get started. Even the businesses that don’t charge up-front fees still charge a monthly fee to manage or negotiate your debt.
Debt Settlement
If you opt for a debt settlement plan you’ll be paying the company instead of paying your creditors, the debt will go to collections. Your credit score will go down, and you’ll be hassled by debt collectors. Negotiation may not be successful, and if it’s not, you could end up with a bigger balance to pay off because of the interest and fees that piled up since you stopped paying. In addition, the IRS treats forgiven debt as income and it will be taxed accordingly.
Consolidating on a Low Interest Credit Card
If you decide to consolidate your credit card debt onto a single lower interest credit card there are a few things to be careful of. Many new credit cards start out with a low rate but then after a short period of time the interest rate will jump. You have to be aware of any changes in the interest charges and when those will go into affect. You’ll be no better off if you still have a high balance and an interest rate that is basically the same as it was before or possibly worse.
You also have to be extremely careful of not making even a single late payment. Today, in the wake of the Credit Card Act, credit card companies are giving customers no leniency on late payments. It is not unheard of for the interest rate to jump to over 25% after just one missed payment.