Pros & Cons of Credit Card Debt Consolidation

It may be small consolation, but if you’re having trouble handling your debt, you certainly have ample company. The New York Federal Reserve pegged U.S. consumer debt in the second quarter at $16.5 trillion, much of it due to credit cards.

As a result, many consumers are turning to a solution called debt consolidation. It  streamlines their financial obligations, usually  at a better interest rate. But this  approach isn’t for everyone. 

photo/ Michael Jarmoluk via pixabay

Here are the pros and cons of credit card debt consolidation to weigh your options.

What is Debt Consolidation?

In the simplest terms, this financial strategy entails merging multiple debts into a new loan with one single payment. You can save money by locking in a lower interest rate. If you have bills with varying balances and due dates, consolidation makes your debt load easier to manage.

Why Should I Consolidate?

Be it through a personal loan, home equity line of credit, or balance transfer card, debt consolidation can help you take control of your finances: 

•  Manage debts better. Your single payment will be fixed, meaning you’ll know precisely how much is due each month, and when. This also means you’re less likely to miss payments and incur late fees. 
•  Pay off debt quicker. With fixed payments and a lower interest rate, consolidation puts you on track to becoming debt free faster.
•  Get a better rate . The average credit card rate is higher than that  on personal loans. So, depending on your credit scores, you’ll probably pay less in interest  than what you’re paying now. You’ll typically need good to excellent credit, however.
•  Set payments.  If you go the route of a personal loan, you’ll know the exact amount due and the date of your final payment. By contrast, it could take years of making minimum payments to pay off a high-interest credit card.
•  Help your credit. Debt consolidation loans make it easier to make timely payments since you’ll only have one balance to track. You’ll also have an improved credit utilization ratio.

Why Shouldn’t I Consolidate?

There are some drawbacks to consolidation, including:

• It’s not a cure-all. If your spending isn’t under control, you may very well find yourself with debt woes again. This is why you should establish and stick to a budget. It is also important to  put together an emergency fund so that you aren’t pulling out the plastic whenever there’s an unexpected expense.
• You’ll incur fees. These can include annual fees, balance transfer fees, and loan origination fees, plus closing costs. You should factor these in when deciding whether this option makes financial sense. 
• Your rate might be higher. If you don’t have at least a good credit score, you might not be able to get a rate that’s lower than what you’re currently paying on average.  Note, too, that if you get your loan term extended, it will probably  lower your monthly payments. However, you might wind up paying more in interest over time.
• Missed payments can really hurt.  You should do everything possible to make on-time payments, particularly following debt consolidation. Otherwise,  you’ll incur a late payment or returned payment fee, which could make it more difficult to get loans with lower rates in the future. 

Carefully weigh the pros and cons of credit card consolidation before you sign off on this solution. If your financial issue  is more acute, you may be better off with debt settlement. It involves paying off your credit card debt for less than you owe in a shorter amount of time. 

Author: Amara Etter