You've missed a payment here and there, and have paid hefty penalty fees on credit card debt. Debt consolidation may or may not be beneficial. Take these pros and cons into consideration before you jump to consolidation:
Debt consolidation advantages
- Reducing time and paperwork required for paying and managing multiple credit card accounts
- Gaining the psychological benefit of exchanging multiple bills for one bill and one payment
- Tracking repayment of one debt is easier than tracking repayment for several debts.
- Consolidating high cost debts to a debt consolidation loan with a lower APR can assist with paying off debt faster.
- Converting revolving credit card balances into a fully amortized loan with a specific number of payments at the same amount provides predictable payments.
- Debt consolidation doesn't pay off your debt, it redistributes it: Consolidating credit card debt can provide a false sense of financial stability--you're still in debt.
- The perils of fine print: Reading the fine print associated with loan agreements and balance transfer offers is difficult, but failing to identify fees and extra charges can negate any benefit of a debt consolidation loan or balance transfers.
- The slippery slope of temptation: Debt consolidation moves all of your credit card debt to one loan with one payment only until you treat yourself at the mall using one of your paid-off credit cards.
- Opening new credit for paying off old credit: Does this make sense? It may if you can reduce finance charges through debt consolidation, but debt consolidation cannot prevent incurring more debt.
- Refinancing or home equity loans put your home at risk: Borrowing against home equity for debt consolidation increases your risk of foreclosure if you cannot make mortgage payments.
Weighing the positive and negative aspects of debt consolidation and other debt help options assists with finding debt solutions appropriate for your situation.