Consolidation means that your credit card bills and loan payments are combined into one monthly payment.
People consolidate debt because they feel it is a way to simplify or lower payments. But there are many things to think about before you enter into a credit card consolidation agreement. And the factors to consider are particular to your situation.
It’s a good idea to talk to someone with financial expertise who has your best interests (not the interests of your lenders) in mind. You should also read these tips and warnings so you’re well prepared to make a decision about how to handle your debt.
Wow — you just got an awesome offer in the mail from XYZ credit card company. They are offering zero-percent, or very low-percent on balance transfers. So, you’re thinking about transferring all the balances from your 3 expensive credit cards to this one.
Warning: Look at the Expiration Date
That zero-or-low interest rate has an expiration date, probably way sooner than you could possibly pay off the balance. And then your interest rate will sky-rocket.
Also, there might be fees in the form of a percentage on each balance you transfer. And the company will tempt you to make new purchases with that card, for which they will charge you exorbitant interest.
Tip: Read the Fine Print
Read every word of the fine print. Make sure you understand when the low-rate will end, and how much you will be charged for transfers. After doing the math, you might discover that this doesn’t look like such a great deal anymore.
Taking out a Debt Consolidation Loan
Bank So-and-So sent you a “check” for a debt consolidation loan, and this form of credit card consolidation will definitely lower your interest rate and simplify your monthly bill paying.
Warning: You Might Not Qualify for Their Low Rates
Again—the rate may be a “teaser,” something with an expiration date. And there might be hidden fees. AND, the rate they quoted is only if you “qualify.” Because you have debt, it’s very possible you won’t get that rate, and after you apply they’ll give you a higher rate.
Tip: Ask a Friend for Help
If you hate doing math, enlist a math-wizard friend or relative to sit down with you and add up all your current payments, fees and interest rates. Compare them with the deal the bank is offering you (read the fine print). Then you’ll know for sure which is better.
Get a Home Equity Loan
Warning: You Might Decrease your Home’s Net Worth
This may look like a sure-fire way to lock in a low interest rate, but you will be decreasing the net worth of your home (by increasing your debt against it) and you might be putting your home at risk.
Tip: Make the Decision for Yourself
Don’t let the bank loan officer make this decision for you. Just because they offer you a certain amount, does not mean you should take it. Do the math, and be sure you know how much you can realistically afford to pay back. Consider that you might lose your job or get sick. Don’t jeopardize your home.
The Bottom Line
Most people don’t succeed in becoming debt free by taking on more debt.
If you really want to solve your debt problem, credit card consolidation isn’t likely to help you. You have to make a commitment to stop spending more than you earn.