Debt consolidation is one strategy for eliminating your credit card debt, and you may see lots of advertisements that suggest consolidation will save you money. However, debt consolidation isn't a one-size-fits-all solution. It's important to evaluate your specific financial situation and spending habits before committing to fighting your debt by taking on even more debt.
Definition
You may consolidate your credit cards in three different ways: through a debt consolidation loan, a zero interest credit card or a line of credit based on equity (usually of your home). Consolidation involves using one of these three methods to gather multiple debts under one new form of credit. Generally, you need to have good credit to qualify to take on a new form of credit for consolidation.
Advantages
The biggest advantage to utilizing debt consolidation is the convenience of paying only one debt each month rather than having to keep track of multiple payment due dates. Also, if you manage to find a debt consolidation loan or home equity line of credit with a lower percentage rate than your current debt, you may save money on your total debt owed. Also, debt consolidation may help your credit score by raising the amount of credit available for you, which positively influences your debt utilization ratio.
Disadvantages
Debt consolidation can be dangerous if you are easily tempted into overspending. Consolidation loans and lines of credit free up your credit, and the only thing stopping you from continuing to spend is your own willpower. According to credit union manager Chris Viale, 70 percent of individuals who take out consolidation loans end up with the same or more credit within two years. Also, consolidating through a zero-interest rate credit card means that you need to pay off your debt over the short introductory period. For all three methods, it's vital to keep in mind that you're battling your debt by taking on more debt, which may lead to a vicious cycle of spiraling farther into the red.
Considerations
A credit counselor may be able to help you become secure in your decision on whether to attack your credit card debt with consolidation or an alternative method of debt elimination. Reputable credit counseling organizations will review your financial situation, then offer you options for getting out of debt, such as paying your debt down with a payment plan, using a debt management plan or even filing for bankruptcy.
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