About Consolidating Credit Card Debts

When you consolidate your credit card debt, you are obtaining a new loan. You have to repay the new loan just like any other loan. If you get a consolidation loan and continue to make more purchases with credit, you probably will not succeed with paying off your debt. If you have problems with credit, consider first contacting a credit counselor.

Consolidation means that your various debts, whether they are credit card accounts or loan payments, are grouped into a single monthly payment amount. If you have multiple credit card accounts or loans, consolidation can be a way to simplify or reduce payments. However, a debt consolidation loan does not erase your debt. In addition, you could end up paying more when consolidating a debt in another type of loan.

Before Using a Consolidation Loan:

Check your expenses. It is important to understand why you have debts. If you have accumulated many debts because you are spending more than you earn, a debt consolidation loan is not likely to help you get out of debt, unless you reduce your expenses or increase your income.

Make a budget. Find out if you can pay your existing debt by adjusting the way you spend, for a period of time.

Try to contact your individual creditors to see if they would agree to reduce your payments. Some creditors may be willing to accept lower minimum monthly payments, avoid certain charges, reduce your interest rate or change your payment date to better match your income, to help you make debt relief.


Here is what you need to know if you are considering loan consolidation:

Transfers of Credit Card Balances

Many credit card companies offer balance transfers with a zero percent interest or with a very low interest, to invite you to consolidate your debts into a single credit card.

What you should know:

The promotional interest rate for most balance transfers lasts for a limited time. After that, the interest rate of your new credit card may increase, which would increase the amount of your payment.

If you are behind more than 60 days in a payment, the credit card company can increase the interest rate on all your balances, including the balance you have transferred.

You will probably have to pay a "balance transfer fee". Usually this charge is, or a certain percentage of the amount you transfer or a fixed amount, whichever is greater.

If you use the same credit card to make purchases, you will not get a grace period for those purchases and you will also have to pay interest until you pay the entire balance in full (including the transferred balance).

Tip: If you decide to make a credit card balance transfer, avoid using that card for other purchases, at least until you have paid the transferred balance. This will help you pay your balance more quickly and avoid paying interest on other purchases.

Debt Consolidation Loan

Banks, credit unions and other lenders offer loans for debt consolidation. These loans accumulate many of your debts in a single payment. This simplifies the number of payments you have to make. These offers may also include lower interest rates than you currently pay.

What you should know:

Many of the low interest rates, offered for debt consolidation loans, can be "introductory rates" that only last for a certain period of time. Then, the lender can increase the rate you have to pay.

The loan may also include charges or costs that you would not have to pay if you continued making your other payments.

Although your monthly payment may be lower, this could be because you would be paying in a longer period of time. Which means you would pay a lot more in total.

Tip: If you are considering a debt consolidation loan, compare the terms of the loan and the interest rates, to know how much interest and fees you would have to pay in total. This can help you choose the loan that saves you the most money.

Loans With Mortgage Guarantee

With a home equity loan, you get a loan against the net worth of your home. If you use it to consolidate debts, you use this loan to pay in full the existing creditors. Then, you have to pay the home equity loan.

What you should know:

Using a home equity loan to consolidate credit card debt is risky. If you do not pay the loan, you could lose your home due to a foreclosure.

Home equity loans may offer lower interest rates than other types of loans.

You may have to pay closing costs with a home equity loan. Closing costs can be hundreds or thousands of dollars.

If you use the net value of your home as collateral to consolidate your credit card debts, it may not be available in case of an emergency, or for certain expenses such as repairs or renovations.

By using your net capital for a loan, your home could be "devalued" if the value of the loan falls. This could make it harder to sell or refinance.

If you want to consolidate your debt, there are some things that you should think about:

By taking on a new debt to pay off an old debt, you would simply be putting off your problems. Most people can not pay their debts by taking on more debt, unless they lower their expenses.

The loans that you obtain to consolidate your debts can end up costing you more in expenses, charges and higher interest rates, than if you had made your payments of the previous debt.

If problems with debts have affected your credit score, you probably will not be able to get low interest rates for the balance transfer, or for a consolidation loan, or for home equity loans.

A non-profit credit counselor can help you compare your options and decide how you want to use the credit in the future, so that the problems that have led you to consider consolidating your debts, do not come back later.