When to consolidate credit card debt?

Anyone who has been thinking about his credit card debt or trying to cut down or eliminate it has, at some point in time, come across the term credit card debt consolidation.

Countless TV ads and newspaper advertisements promise freedom from high monthly payments, worry and frustration - so the idea of debt consolidation seems like a very good option.

The consolidation process consists of combining all your various unsecured outstanding card balances together into one lower rate card or with a personal loan, often with a smaller monthly payment.

A loan to consolidate credit card debt can be found quite easily these days, both online and off. The lender, would, once you get the consolidation loan, pay off your outstanding individual loans and combine their current balances into a new loan. This is “supposed” to lighten your regular monthly debt servicing burden and give you freedom from the stress you’ve been experiencing.

The advantage when you consolidate credit card debt is that you now have one loan with one monthly payment to be given to one single lender, simplifying the repayment schedules and increasing the total length of time available to you to pay off the loan.

Ideally, the interest rate on these loans to consolidate credit card debt are fixed, and the rate is determined by calculating a weighted average of your existing loans. Understand, however, you may pay more interest if the time period for repayment is longer, so, as soon as the current financial crisis passes, consider increasing the amount of monthly payment or ask about making extra payments in order to minimize the total interest payments.

The ads you see for debt relief services and debt consolidation point out only the positive side. They do not tell you the whole story. Consumers need to be knowledgeable on the negative aspects as well, in order to make an informed decision. So as a general rule, don’t just rush into debt consolidation without doing some basic research on your own first.

Debt consolidation has disadvantages. To get lower monthly payments, you have to have a lower interest rate or a longer period of payment. Obviously, as you extend the total repayment period of your loan, you are charged additional interest over time, and this added interest increases the total amount of debt you are responsible for unless you pay off the debt early.

The debt consolidation company does not really lower your overall debt, what it mainly does is extend your loans from short-term ones lasting up to three years, to long-term loans for as long as 30 years if you consolidate using a new mortgage on your home.

The real problem of consolidating credit card debt is the “perceived” fresh financial start that it gives you. In essence, the consumer gets the good feeling of having wiped out multiple debts and with the lower payment they feel as if their finances are now back under their control.

Unfortunately, most consumers don’t change their spending behavior after the debt consolidation so they quickly find themselves running up new debt on those freshly paid of credit cards.

Remember, unless you actually close the accounts, you still have all the old credit cards, now with a zero balance. In fairly short order you could easily end up in a worse financial crisis that you started with.

Unless you have the strength and willpower to stop using credit cards, consolidating debt may be the worst thing you can do. The feeling of safety and sudden financial strength might tempt you to start using the cards again, repeating the process of mistakes that got you into trouble before.

To simply Consolidate credit card debt is not always the answer. Turn your attention instead to increasing your income and getting those multiple credit cards paid off and closed just as quickly as possible. Whatever you do, proceed with caution.

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