Credit cards are an excellent convenience for daily life. By making purchases safe and easy, the credit line they provide can smooth the bumps in your finances and potentially help you grow your credit if used responsibly. However, this undoubted convenience can come with a serious downside.
It’s all too easy to build up a problem balance on your credit card, and the amount of debt can creep up surprisingly quickly. In many cases, large sums of credit card debt can drain your finances. Add in high-interest rates and credit cards can soon become an inefficient way of using your money.
Furthermore, hefty debt can become a real issue, threatening financial wellbeing and causing huge amounts of worry and stress.
In either of these situations, consolidating your credit card debt can provide a quick and effective solution, helping you get your finances back under control. But as with all areas of personal finance, it’s important to know what you’re getting into before you start.
There are some genuine downsides to go with the many positives of a credit card debt consolidation, and it’s wise to weigh both sides carefully before committing yourself.
Credit Card Consolidation: The Advantages
A credit card debt consolidation can have four major benefits for your everyday finances.
Lower Monthly Payments
By turning expensive card debt into a loan with a lower interest rate and a longer repayment period, your monthly repayments will be made more manageable. If you’re struggling under the pressure of card debt, a consolidation can provide a safety valve.
Faster Debt Clearance
As with many credit cards, the majority of each monthly payment is taken up by interest charges. This leaves most of the debt untouched. With a consolidation loan, the payments make a much greater impact on what you owe, clearing your debt more quickly.
Improve Your Credit Score
Reducing the amount of debt you hold on cards could have a positive impact on your credit score. With lower balances, you’ll be using less of the available credit. As a result, your ‘utilization rate‘ could go down and may help you improve your scores.
If you’re aiming to increase your credit score, an effective consolidation combined with online credit improvement tools, such as those found in ScoreShuttle, is a great way to start. To learn more software solutions you can use to improve your credit score, click below.
Simplify Your Finances
Combining multiple card debts into a single consolidation loan makes your financial life simpler. You’ll only have a single repayment to make, so it’s easier to budget and there’s less chance of being hit with late payment charges.
Credit Card Consolidation: The Disadvantages:
Alternatively, while the potential benefits of credit card consolidation are powerful, there are some downsides that need to be considered.
Increased Overall Cost
By taking out a loan over a longer-term, you may wind up paying more in interest charges overall, even if the monthly payments themselves are lower. Over several years, the total amount you’re charged can be considerably higher. However, this is a price many people are happy to pay to enjoy the benefits of consolidation.
Secured vs. Unsecured
If you use a secured loan to consolidate your card debt, you’ll be converting an unsecured debt into one which could potentially risk your home. Credit card debt is stressful, but foreclosure is a risk to be taken very seriously indeed.
You’ll Still Owe the Debt
Although consolidating debt can give relief from financial pressure, it doesn’t change the underlying situation. You’ll still owe the money, you’ll just have a little longer to pay it off. If you don’t get the figures right, and your repayments aren’t affordable, a consolidation likely won’t help.
Risks of a Clean Slate
Perhaps the biggest drawback of consolidation is the sense of being given a fresh financial start. Without the weight of a credit card balance hanging around your neck, it’s easy to fall into the trap of resuming spending, racking up a new card debt to replace the one you’ve consolidated.
If you don’t have the discipline to avoid this, you could find yourself with even worse debt problems than before.
Despite these potential downsides, credit card consolidation can be a powerful way of improving your financial situation. If you want to lower your monthly payments, take control of your credit score, and reduce the stress of debt problems, it could be a great option.
Disclaimer: The information above is general in nature and is not a comprehensive list of all pros and cons, or repayment, consolidation, or debt assistance options that may be available to you. Anytime you change or consolidate payments, additional term lengths and/or interest may be applied. Always be sure to check with your personal financial advisor to determine if a credit card consolidation is best for you.