Credit card debt is known to cause an enormous amount of havoc in a person’s life. Once several credit cards are maxed out, paying down the debt becomes difficult even when the interest rate is reasonable. Several cards with high interest rates are doubly difficult to pay down. Each and every month, money ends up going to pay interest. The principle amount ends up being barely touched.
At some point, steps do need to be taken to eliminate the debt. Consolidating credit card debt is probably the most common approach most take. Is credit card consolidation the best plan of action to follow? Honestly, there may be a better way. Some financial gurus even suggest not consolidating credit cards. Many, however, have done so to great success.
Generally speaking, consolidating credit cards is an available option but the process comes with caveats.
Consolidating Credit Card Debt: The Basics
The process of consolidating credit card debt means the balances of several different accounts are paid off by a single loan. Now, only that one debt has to be paid off. This does make things simpler and easier to budget. There are a few ways in which this can be done.
The Balance Transfer
Credit card companies like to take business away from each other. One method to luring clients away entails offering low-interest or no-interest credit card transfers. Depending upon the limit awarded with the new card, two or more credit cards may be consolidated with the new one. As long as the new debt is paid off quickly, interest won’t even be factored into the obligation.
A Debt Consolidation Loan
A line of credit or personal loan could be used for debt consolidation. A higher credit limit may be possible with either of these two lending options. A balance transfer credit card might be limited in terms of the available credit. For those with more debt than can fit on a single credit card, going with this particular loan makes more sense. There is going to be interest required on the loan, but the interest probably will be much lower than what is found on a credit card. Also, the interest won’t fluctuate as is the case with credit cards known for low introductory offers.
Secured Consolidation Loans
Secured consolidations loans are those loans backed by collateral. When the amount to be consolidated is significant, then collateral may be required for a lender to approve a particular loan. Home equity loans, however, are often chosen because the interest rates are very low. Secured loans may be easier to procure since the loan is being backed by assets in case of a default.
The Trouble with Debt Consolidation Loans
Based on the simple process of consolidating a loan, it would seem there is very little wrong with putting a tremendous amount of debt into one account. A host of problems can and do arise when playing the debt consolidation game.
The biggest problem with consolidating debt is the risk of running up even more debt. Once the balances on those credit cards have dropped to zero, the account holder has free reign to start charging on them again. $30,000 in credit card debt moved to a $30,000 home equity loan could turn into $60,000 in debt if the cards are maxed out again. The extreme danger here is no other options may be available to pay off the new — more massive — debt.
The problem with not being able to pay secured debt means the collateral can be seized. With a home equity loan, a lien could be issued and the property lost. Yes, the most important asset associated with net worth — a home — could be lost due to a return to improper spending habits.
Going the Route of Debt Management
Before accepting any offers for debt consolidation, it may be wise to seek out a reliable debt management plan. Debt management helps with setting a new budget and coming up with a strategy to reduce all current debt. Discipline is most definitely required with this strategy. The risks are limited. In time, with the right plan, being debt free may very well result.