The funny thing about credit card debt – if it can be said that there is anything funny about it – is the way it can just sneak up on you. I read recently the story of one couple that had more than $100,000 in credit card debt and had never done anything extravagant. They had not purchased an expensive home, gone on costly vacations or purchased a luxury automobile. They had managed to run up all this debt doing what they described as the “boring way,” one charge at a time.
If credit card debt has crept up on you
If you now find yourself floundering in credit card debt, you might be able to get it back under control with a debt consolidation loan. It’s a simple and fairly quick way to get on top of credit card debt because all you have to do is borrow enough money to pay off all of your credit cards.
When it makes sense
A debt consolidation loan makes the most sense if you have multiple credit cards with high interest rates. It can also make sense if you’re having a problem remembering when your payments are due or if you’ve actually failed to make some of them. This is because a debt consolidation loan merges all of your accounts into one single monthly payment, which should be much more affordable than the sum of your current payments. You will have a lower interest rate and should be able to get debt free in seven to 10 years – depending on how much you owe. Plus, you will have only one payment a month to remember.
Not for everyone
While a debt consolidation loan could be a miracle cure for your debt problems, they’re not for everyone. For that matter, you might not even be able to get one – depending on how much money you owe. Financial institutions tend to be very leery about lending money to people who are already in trouble with debt. If you owe $10,000, $15,000 or more, you may have to get what’s called a secured loan. To get one of these type of loans, you’ll need an asset you can use as collateral. This usually takes the form of a second mortgage or homeowner’s equity line of credit (HELOC). If you don’t have sufficient equity in your home to borrow the amount of money you would need to pay off your credit card debt – or don’t own a home – you may not be able to give a debt consolidation loan at all.
If you do qualify
If you can qualify for a debt consolidation loan, there are still some issues to consider. First, it will cost you more than paying off your credit cards because you’ll be paying for a longer period of time. As noted above, your second mortgage or HELOC might have a term of seven to 10 years. You would be paying less interest per month but you’ll pay more over the life of the loan.
A debt consolidation loan isn’t enough
Getting rid of all that credit card debt by consolidating it into a single loan might seem like a miracle come true. However, it can turn into a mirage unless you combine it with good budgeting and better money management. Poor money management is what got you into trouble in the first place and you have to learn to do better. If not, you’ll be adding new debt on top of that loan and could end up in worse shape than when you started. You will need to create a budget and learn to stick to it. If you haven’t ever done a budget, don’t worry. There’s a lot of free information available online that can get you started. Budgeting is not difficult and once you make it a habit, you’ll find that your life will be easier and simpler.