Why You Should Consolidate Credit Card Debts

Consolidating credit card debt means combining multiple debts into one line. This can be either a single credit card or a loan. There are several advantages to this, including organizational, financial and psychological benefits, though it is not without limitations and drawbacks.

Organization

Whether you consolidate the card debts into a single card or a single loan, you will now only have to make one payment each month. From an organizational perspective, this may make life simpler, as it becomes easier to plan for when the month's payment is due. Usually a lender will allow you to set the payment date so that you can minimize the risk of cashflow problems. Another benefit is that you do not have to keep track of the total amount that you owe.

Rates

How consolidation affects the rates you pay depends on the method you use. With a loan, the likelihood is that you will be paying a lower rate that with credit cards. With cards, you may either have transferred all your debt to the card with the lowest rate or taken out a new card with an introductory offer of a 0 percent rate or a low rate on transferred balances. In both cases you will need to stick to the terms and conditions to ensure you do not lose the benefit of the lower rate. With cards, it is a smart idea to put as much of the "savings" from the lower rate as you can afford toward paying off more of the balance.

Credit Score

Having a single card or loan can benefit your credit record and score in two main ways. First, the outstanding debts will be cleared and thus no longer show up as overdue on your record. Second, as long as you make the payments on your remaining card or new loan, you will be able to build up your positive credit history, increasing your chances of getting favorable credit in the future.

Cautions

Taking out a single loan will usually reduce the interest payments, but you will lose the benefit of only having to pay the small minimum payment. You will be committed to a monthly installment repayment, which can be a problem if your previous credit issues were caused by an inconsistent income. You will also likely be tied in to the full length of the loan, meaning you cannot clear the balance early (saving on interest charges) if your finances improve.