Credit card debt consolidation can be very tempting for people feeling overwhelmed by credit card debt. There are several credit card consolidation options to consider, each with their pros and cons.
You can consolidate with a home equity loan, also known as a second mortgage, or a home equity line of credit, a revolving credit account in which your home serves as security for the debt. Debt consolidation loans provide one lump sum intended to pay off all your debts. Getting such such a loan will often require your home as security on the loan.
A debt consolidation company offers to negotiate with your creditors to help settle your debt and pay it off through one monthly payment. A debt management program (DMP) is a structured program which administers paying off all your credit cards through low monthly payments. There is not usually any debt settlement, though fees and penalties can be negotiated.
Credit Card Consolidation Pros
The main benefits of credit card consolidation are that you are making one single monthly payment to one creditor. The payments will usually be reduced, and if you get a good negotiated settlement, you could pay up to 60 less than what you would individually on the balances you owe. Collection agencies will no longer be able to harass you, but will be referred to the consolidation company or DMP.
The loan and line of credit options can cover not only credit card debt, but medical bills, and help you get on track with any mortgage arrears. A consolidation loan and DMP should also be able to help with this.
A consolidation loan tends to give more favorable terms than a regular bank loan and credit cards, so you might end up with a lower interest rate overall on what you owe. With a home equity loan, you might be able to negotiate a lower interest rate, and can benefit from the tax deductions from paying mortgage interest rather than non-deductible interest.
Credit Card Consolidation Cons: Do The Numbers Really Make Sense?
Credit card consolidation should not be undertaken without a lot of thought. The main disadvantage is that if you choose a home equity loan or line of credit, you could risk losing your home. In the case of a consolidation loan, the lender would also require your house to be used as security for the loan.
If you are not a homeowner, then with so much debt and a poor credit rating, you actually might end up paying a higher interest loan. Once you apply for debt consolidation, the lender will discover your full financial predicament. The lender might decide that you are carrying too much debt, and leave you with little alternative but to pay high interest to them, or declare bankruptcy.
Be sure to run the numbers carefully. The monthly payments and interest rate might appear lower in the short term, but you might end up with a longer-term loan, which will mean paying more in the end. Also beware of the fine print, including hidden charges or fees, or early repayment penalties.
Credit Card Consolidation Cons: Long Term Consequences
Many credit card consolidators claim that your credit rating will not be affected by consolidation. But unless you are paying all the cards off in full via a loan, any negotiated settlement you make will appear on your credit report. Your account will usually be frozen as well, therefore sacrificing the little credit you might have left.
Not all debt consolidation services or DMPs are trustworthy and reliable, the Federal Reserve Board warns. Such companies also may not be able to do all they claim they will do. If they pay your credit cards late, you might end up in even more trouble, paying more in penalties, or even being considered in breach of the agreement and liable for the full outstanding balance.
0 comments:
Post a Comment