If you are struggling to pay off multiple credit cards, consolidating your debt may allow you to reduce your interest rates and lower your monthly payment. However, a lower monthly payment can mean a longer repayment term and more interest paid over the life of the loan. Whether you should consolidate your credit card debt depends on your individual circumstances and the terms of the consolidation.
Read on to learn more about whether credit card debt consolidation is right for you.
(To learn more about managing credit card debt, see out topic on getting out of credit card debt.)
What Is Credit Card Debt Consolidation?
Consolidating your credit card debt essentially means combining all of your debt into a single loan or paying your creditors through a single monthly payment. You can do this by taking out a consolidation loan or using a debt consolidation or management company.
How Does Credit Card Debt Consolidation Work?
When you obtain a debt consolidation loan, you pay off all of your outstanding credit cards with its proceeds. This means that instead of owing money on multiple credit cards, you now have a single obligation. The amount of your monthly payment will depend on the total amount, interest rate, and payment terms of your consolidation loan.
Should I Use a Debt Management Company to Help?
There are thousands of companies that claim they can help you consolidate or manage your credit card debt so that you pay less or reduce your payment.
Typically this is how these companies work: Instead of obtaining a new loan to pay off your credit cards, the debt management company tries to negotiate with the credit card companies to reduce your interest rates or otherwise lower your monthly payments. Each month, you make a single payment to the debt consolidation firm and it distributes a portion of your payment to each of your creditors. Usually, it also keeps a portion (or sometimes all) of your payment to cover its own fees.
While there are some legitimate companies that provide this service for a very low fee, many companies charge huge fees and do little on your behalf.
(You can learn more about debt management and debt negotiation companies in our Debt Settlement & Negotiation topic area.)
Is Credit Card Debt Consolidation Right For You?
Below are some of the main factors you should consider when deciding whether consolidating your credit card debt is in your best interest.
Can You Afford to Pay Off Your Credit Cards?
Consolidating your credit card debt does not eliminate it. Even if the consolidation reduces your monthly payment, you still have to pay off all of your debt. So if you don’t have regular income or can’t afford your monthly payment, consolidating your credit card debt will not help you get back on track.
Will Consolidating Your Credit Card Debt Reduce Your Interest Rates?
One of the main benefits of consolidating your credit card debt is getting a reduced interest rate. Reducing your interest rate allows you to lower your monthly payment and pay off your debts sooner. As a result, if you can’t lower your interest rates by consolidating your credit card debt, then it is probably not worth the extra cost and fees you will have to incur to do it.
Will It Take Longer to Pay Off Your Debt If You Consolidate?
By consolidating your credit card debt, sometimes you can significantly reduce your monthly payment. However, don’t assume that your payment went down solely because of a lower interest rate. If your new monthly obligation is substantially lower, it usually means a longer repayment term.
If your repayment term is extended when you consolidate, it may take you significantly longer to pay off your credit card debt. While it may be nice to have a more manageable monthly payment, it also means paying more interest over the life of the loan. Review the terms of your consolidation carefully before deciding that it is the right choice for you.