What do I need to know if I am thinking about consolidating my credit card debts?
When you consolidate your credit card debt, you are getting a new loan. You have to pay the latest loan just like any other loan. If you get a consolidation loan and keep making more purchases with credit, you probably won’t be successful with paying off your debt. If you have credit problems, consider contacting a credit counselor first.
Consolidation means that your various debts, whether credit card accounts or loan payments are grouped into a single monthly payment amount. If you have multiple credit card or loan accounts, consolidation can be a way to simplify or reduce payments. However, a debt consolidation loan does not erase your debt. Besides, you could end up paying more by consolidating a debt into another type of loan.
Before using a consolidation loan:
Check your expenses. It is essential to understand why you have debts. If you have accumulated many debts because you are spending more than you earn, a debt consolidation loan is probably not going to help you get out of those debts, unless you reduce your expenses or increase your income.
Make a budget. Find out if you can pay your existing debt by adjusting the way you spend, for some time.
Try to contact your creditors to see if they would agree to reduce your payments. Some creditors may be willing to accept lower minimum monthly payments, avoid certain charges, lower your interest rate or change your payment date to better match your income, to help you pay off your debt.
This is what you need to know if you are considering loan consolidation:
Credit Card Balance Transfers
Many credit card companies offer balance transfers with zero percent interest or shallow interest, to invite you to consolidate your debts into a single credit card.
What you should know:
The promotional interest rate for most balance transfers lasts for a limited time. After that, the interest rate on your new credit card may increase, which would increase the amount of your payment.
If you pay more than 60 days in a payment, the credit card company can increase the interest rate on all your balances, including the balance you have transferred.
You will probably have to pay a ” balance transfer fee “. Usually, this charge is, or a certain percentage of the amount you transfer or a fixed amount, whichever is greater.
If you use the same credit card to make purchases, you will not get a grace period for those purchases and also, you will have to pay interest until you pay the entire balance in full (including the transferred balance).
Tip: If you decide to make a credit card balance transfer, avoid using that card for other purchases, at least until you have paid the transferred balance. That will help you pay the balance more quickly and avoid paying interest on other purchases.
Debt Consolidation Loan
Banks, credit unions and other lenders offer loans for debt consolidation. These loans accumulate many of your debts in a single payment. This simplifies the number of payments you have to make. These offers may also include lower interest rates than you currently pay.
What you should know:
Many of the low interest rates, offered for debt consolidation loans, can be “introductory rates” that only last for a specified period. Then, the lender can increase the price you have to pay.
The loan may also include charges or costs that you would not have to pay if you continued making your other payments.
Although your monthly payment may be less, this could be because you would be paying over a more extended period. Which means you would pay much more in total.
Tip: If you are considering a debt consolidation loan, compare the loan terms and interest rates to find out how much interest and fees you would have to pay in total. This can help you choose the loan that saves you the most money.
Home equity loans
With a home equity loan, you get a loan against the net worth of your home. If you use it to consolidate debts, you use that loan to pay in full to existing creditors. Then, you have to pay the home equity loan.
What you should know:
Using a home equity loan to consolidate credit card debts is risky. If you do not pay the loan, you could lose your home under foreclosure.
Home equity loans may offer lower interest than other types of loans.
With a home equity loan, you may have to pay closing costs. Closing costs can be hundreds or thousands of dollars.
If you use the net worth of your home as collateral to consolidate your credit card debts, it may not be available in case of an emergency, or for certain expenses such as repairs or renovations.
By using your net capital for a loan, your home could be “devalued” if the value of the investment falls. This could make it harder to sell or refinance.
If you want to consolidate your debt, there are some things you should think about:
By assuming a new mortgage to pay off an old debt, you would only be putting off your problems. Most people fail to pay their debts by taking on more debts, unless they lower their expenses.
The loans that you obtain to consolidate your debts may end up costing you more in expenses, charges and higher interest rates, than if you had made your previous debt payments.
If the problems with the debts have affected your credit score, you will probably not be able to get low interest rates for the balance transfer, or a consolidation loan, or home equity loans.
A nonprofit credit counselor can help you compare your options and decide how you want to use the credit in the future, so that the problems that have led you to consider consolidating your debts, do not come back later.
Further more information about credit card debt consolidation or help with payday loan debt you can visit online experts.