What is Credit Card Debt Consolidation?
If you’re really struggling to pay off multiple credit cards, consolidating your debt could be a route that you can take that might let you reduce your interest rates as well as lower your monthly payment. Sometimes, a lower monthly payment means that you take a longer time to repay what you’ve borrowed and results in more interest paid throughout the life of the loan.
Simply put, what is credit card debt consolidation?
Credit card debt consolidation is when you take all of your debt and combine it into a single loan. It can also sometimes mean that you pay your creditors through a single monthly payment. You can start a credit card debt consolidation by taking out what’s known as a consolidation loan or by using a debt consolidation or management company.
The way it works is that you pay off all of your outstanding credit cards with the proceeds of a debt consolidation loan. This results in you owing money to one agency or firm instead of owing money to multiple companies. The amount you pay monthly varies depending on the total amount, the interest rate and the payment terms of your consolidation loan.
Should you approach a debt management company for help?
Many companies exist that claim to help you consolidate and manage your credit card debt. They claim they can help reduce your payment. Most of these companies operate in the following way.
They approach the credit card companies to try to reduce your interest rates or lower your monthly payments. Every month, you make a single payment to the debt management company which then distributes a part of your payment to each of your creditors. Everything sounds fine until here.
What also happens is that the debt management company usually keeps apart or sometimes all of your payment to cover their own fees and expenses.
There are some companies out there who legitimately want to help people with their debt. However, there are many more companies who pose as people who’ll help but ultimately do very little to help and charge very high fees.
Is credit card debt consolidation for you or not?
Think about these factors when deciding whether to consolidate your debt or not.
- Do the math and find out if you can afford to pay off your credit cards – Consolidating your debt doesn’t remove it from the big picture. It might reduce your monthly payment; however, you’ll still need to pay off all of your debt. If you can’t afford the monthly payments, then consolidating your credit card debt may not be the best course of action for you to take.
- Find out if consolidating your credit card debt reduces your interest rate – The main reason why people opt for consolidation of their credit card debt is so that they can get a reduced interest rate. When you reduce your interest rate, it will let you pay off your debts sooner. If you can’t lower your interest rate by consolidation, then it isn’t worth the extra hassle and fees.
- Find out if it will take longer to pay off your debt if you consolidate your debt – Just because you lower your monthly payment by consolidation doesn’t mean that your payments will go down significantly because of a lower interest rate. A longer repayment term usually coincides with a lower monthly payment. It might seem nicer to pay less each month, however, consider the fact that a longer loan period means more interest paid over the life of the loan. Read the terms of your consolidation carefully before deciding whether its right for you.