Are you heavily in debt? I mean do you owe $30,000, $50,000 or even more – $100,000? If so, consolidating your credit card debt could be a good solution–depending on the option you choose.
Debt consolidation loan
The first way that you can consolidate credit card debt is through a debt consolidation loan. But one of these loans has both pros and cons.
The advantages or pros of a debt consolidation loan are that first, it will get all of your credit card companies off your back so there won’t be any more of those harassing phone calls either from them or from debt collectors.
Second, you will have a lower monthly payment because you will have a lower interest rate and more time to pay off the loan. For example, your credit cards might have interest rates as high as 18% or 21%. In comparison, you should be able to get a secured debt consolidation loan such as a second mortgage or home owners equity line of credit with an interest rate of less than 4%. You could easily see the savings of several hundred dollars a month, which you could use to make your life less stressful. What’s more, you won’t have to worry about any more late fees and could see your credit score improve.
The disadvantages of a debt consolidation loan
Unfortunately, there are disadvantages to a debt consolidation loan just as there are with many things in life. For one thing, you will probably end up paying back more in principal and interest than the previous credit card payments combined. There may also be other costs associated with a consolidation loan. If you use your house as collateral, there could be closing costs and extra points applied by the lender. Your credit could also be hurt depending on the credit score used by your lender.
Consolidate your credit card debts through a debt management program
The second option for consolidating your credit card debts is through a debt management program (DMP). This is usually done in conjunction with the consumer credit counseling agency. If you select this alternative, you will be assigned a credit counselor. He or she will go over your finances and help you develop a debt management plan or payment plan. Your counselor will then negotiate with your creditors to lower your interest rates and to waive any late fees. Once the credit card companies sign off on your debt management plan, you will need to send a check each month to the consumer credit counseling agency. It will then pay your creditors for you.
The pros and cons
The advantages of the debt management plan is that it will stop credit card companies and debt collectors from harassing you. Your monthly payment to the credit counseling agency will most likely be less than the sum of your credit card debts prior to enrolling. Your credit score may go up because you will be creating a steady payment pattern. However, it may go down because lenders will see that you are working with a third party to pay your bills.
What are the cons? Not all credit card companies may agree to your debt management plan. Some will simply not agree to participate. You could end up with a fairly significant payment to the credit counseling agency, plus payments to one or more credit card companies. Finally, if you miss a payment or make a late payment, you could be dropped from the program.
Debt settlement
A third option for consolidating your credit card debt is through debt settlement, which is what we recommend. This works somewhat like a debt management plan (DMP) in that you will end up making just one payment a month instead of the many you may be making now. It’s different from a DMP in that it can get your debts and interest rates reduced and help you become debt free in 24 to 48 months. You can learn more about debt settlement to see if it will work for your financial problems.
The pros and cons of settling your debts
You can pick a payment plan that fits within your budget. This can provide you some much needed relief each month with a smaller monthly outlay. Of course, the more you can set aside each month to settle your debts the faster you can become debt free.
A settlement plan usually takes 24 to 48 months and it can save you thousands compared to most other debt relief plans.
One big con is that your credit score can be negatively affected by this program. It is an alternative to bankruptcy so the impact on your FICO can be similar. However, your score can be rebuilt rather quickly once you no longer have maxed out credit cards.
If you are serious about getting out of debt, you need to evaluate all of your options for consolidating your credit card debt.