The lure of taking thousands of dollars of credit card debt and obtaining a debt consolidation loan that will take your monthly payment down to just a third or fourth of what you are currently paying with minimum payments is very tempting. While credit card consolidation can be a solution in some situations, it isn’t for everyone, and you would be wise to have full understanding of what is being done and the potential traps to avoid.
First of all, credit card consolidation won’t solve everything. It is not a magic wand that takes away all your credit card debt. It just shuffles it to another place with new terms, including a new interest rate and loan period. In essence, what it does is spread the payments out much further so that the monthly chunk out of your budget is easier to handle. The downside is that it is going to be a part of your budget for considerably longer. Instead of having 3 to 5 years of debt (if you stop using your credit cards), you could face up to 30 years.
The second trap is that when you pay off the credit cards, it can often result in a higher credit score, and not only will your current credit card companies increase your limits, but you’ll also receive plenty more offers in the mail. Without due care and attention, you could easily end up with a mountain of new credit card debt, in addition to the credit card consolidation payment.
Another mistake is consolidating debts that have more favourable terms than the credit card consolidation loan. At the very least, leave those out. While on the subject, be sure you know what the interest rate is on the new loan, and don’t hesitate to negotiate if it is higher than what would be helpful for your situation. Be sure to look at the other terms of the loan, as well, as there could be fees you didn’t realize (such as balance transfer fees), the interest rate may increase after an introductory period, or other fees could make the consolidate loan far less feasible.
If you would like to know more about personal debt consolidation, as well as discuss personal financial planning to learn if there is another route you should take to meet your financial obligations without falling into a trap that only makes matters worse in the long run, give us a call at Morgan & Partners Inc. We will be happy to help you formulate a plan to become debt-free that makes the most sense for your situation.