Many Americans are no stranger to big credit card bills. When you are neck-deep in credit card debt, it can seem like there is no end. Sometimes it may feel like any option can be justified temporarily as your saving grace, but when it comes to credit card debt consolidation, it pays to take a close look at your circumstances before committing to anything. More importantly, you’ll want to answer the question, “When does debt consolidation make sense to pay off credit cards?”
Before we get too ahead of ourselves, it’s important to fully understand what you would be getting yourself into if you signed up with a company who can help you roll your debts into one.
- What exactly would the plan look like?
- How long would it take?
- How much will the monthly payments be?
These questions and others should be carefully addressed before signing on the proverbial dotted line.
When Does Debt Consolidation Make Sense to Pay Off Credit Cards?
It’s time to answer all the base-level questions first – then we can appropriately decide whether debt consolidation is the right way to go.
What debt consolidation actually is (and is not)
You have probably heard of consolidating debt. But, if you are truly considering it, then you should know exactly what it entails. When you consolidate credit card debt you have two basic options:
- A new card, or
- A personal loan
1) Consolidating onto a new card
You may want to transfer all your credit card debts onto a new card. Doing this means you will only have to focus on one payment a month and a single interest rate. Some cards offer low or non-existent interest rates for the first year or so. This means you can save some money if you choose a fast payment plan. Take transfer fees, changing interest rates and other charges into account when looking for a consolidation credit card. Many of them also have stringent credit requirements you will want to be made aware of before committing.
2) Consolidating with a loan
Sometimes a personal loan could be the way to go. It is possible to qualify for some loans. Whether it’s worse credit or no credit check at all, be on the lookout for predatory loan offices.
The Better Business Bureau can be a good resource to help you determine if lenders are legitimate. Involving a non-profit credit counselor can also help you choose the right fit for your personal situation.
Remember that credit card debt is unsecured. This means there are no ties to a tangible asset such as a home loan (mortgage) or auto loan. Be careful consolidating that credit card debt with a secured loan. You could stand to risk losing property or assets if you fail to make payments.
Consider how you ran up the debt in the first place
Another thing to consider when debt consolidation is on the table is how you came to be in debt in the first place. Many Americans are in debt, and for a lot of different reasons. Debt consolidation can help you pay off your debts. But, if you are at risk of simply running them up again, then it is akin to putting a bandage on a wound that never fully heals. It might help you temporarily, but it will not address the root of the problem.
…So when you’re asking yourself, “When does debt consolidation make sense to pay off credit cards?” and you know you’re not fully committed to changing your lifestyle…then it’s probably not a good idea.
Debt consolidation can be a good move. People who have run up debt due to circumstances outside of their control may want to consider this option. For example, needing to deal with a series of emergencies or medical costs one right after another for a period of time. However, if the credit card debts are a result of living outside your means or having a spending problem, then the debt is likely to come back shortly after the consolidation is complete, which could set you back even longer.
Credit counselors can be helpful here, as well. They can help you analyze your spending habits and determine how to best address them while also dealing with the debt owed.
Take note of what your interest rates look like
Interest rates are the number one reason why people look into debt consolidation. You can save a lot of money by moving high interest debts over to a card with a lower rate. Remember to take into account the length of any given interest rate though. Many cards advertise low rates that are not permanent and some even have extra fees associated with debt transfers or consolidations. So comparing interest rates is more than just a one on one comparison of the base interest rates.
Make sure the math actually checks out
Debt consolidation may look appealing, but sometimes a second glance over the numbers could reveal otherwise. Just because you will be paying a lower interest fee on your consolidation loan does not necessarily mean you will be saving time or money paying off your debt through one. Be sure to take into account all the extra charges and potential pitfalls of debt consolidation to see if it is really worth it to you. If you are unsure, you may want to consult a credit counselor about the options available to you.
Sometimes, debts “forgiven”, or otherwise negotiated by your consolidation company, can be viewed by the IRS as income. If it is viewed as income on your part, you may end up paying taxes. Be sure to thoroughly vet each line item of your consolidation agreement and how it may be viewed by the IRS.
Depending on how it goes, debt consolidation can actually end up hurting your credit score for longer than intended. For example, you may have to close your old credit cards once the debt has been moved from them. This can negatively affect your debt usage ratio. This can be one of the factors taken into account for your credit score.
Some consolidation options come with upfront fees, which may require you to pay a percentage of your debt up front. And while mathematically the fees may still be worth it, you need to still take into account whether or not you can afford to pay extra charges up front in order to save money in the long run.
Planning is key
Deciding whether or not to seek consolidation for your debts really comes down to forethought. For every person in debt, consolidation is either a viable option or it is not. If you take the time to look at the figures and go over your debts and spending habits honestly, then you will have a better understanding when determining whether or not consolidation can help you.
So when does debt consolidation make sense? Only when it truly benefits you financially…
Christine Yaged is a co-founding partner and Chief Product Officer of FinanceBuzz. Christine launches and scales brands. She is passionate about technology, digital marketing, and people.
AUTHOR LaTia Longuemire
My name is LaTia Longuemire. I enjoy writing, singing, and cooking in my spare time. My passion is helping others. At this stage in my lifetime, I'm primarily focused on my children. They are everything that keeps my world spinning.