About Credit Consolidation

When times get tough with money, people look for a way to lower their bills. If you have good credit and want to maintain it during an economic crisis, you may consider credit consolidation. This can help you in some situations, but in some ways consolidating credit can actually hurt you in the long run. Read on for an explanation of how credit consolidation works.

Function

Credit consolidation is when you decide to place a number of credit balances onto a single account. Let's say you have three cards with balances of $1,000 a piece, but are close to the max. You have a fourth card that has zero balance but a maximum credit of $5,000. You may decide to transfer all three balances to the high-limit card.
Credit cards aren't the only forms of debt you can consolidate. Consolidation can happen with car payments, student loans and personal loans, too. For either service you can hire a company and pay them a fee to negotiate lower rates with your creditors so that when you consolidate you are making one single payment to cover several types of debt.

Benefits

Consolidating credit cards can make paying bills a little more streamlined. Instead of having several due dates with different minimum balances required on varying interest rates, consolidating credit onto one card brings all the debt into one rate. In many cases you can end up paying less per month on your credit cards than when they were separate bills.

Considerations

The biggest warning about credit consolidation is that the balance transfer can cost you more if the interest rate is higher on the absorbing card. Let's say those three cards were costing you $100 a month and it would take you 40 months to pay them off if you only paid the minimum balance at 19 percent. If your higher-limit card has an interest rate of 24 percent and you pay the minimum balance of $80, it could take you even longer to pay off because of the higher interest rate.
Paying a company to consolidate your credit can also run you out of money. You could end up paying a lower amount per month to cover all the bills, but that could include a fee for each account, usually at 10 percent per balance. If you have many accounts to consolidate, these fees can add up.

Expert Insight

Experts say that you can pay off your debt faster if you try to refinance other loans you may have in order to pay off debt. For instance, you may be able to refinance your car loan by 3 percent. If you negotiate your interest rates with the creditors and apply that 3 percent savings, your debt can go down a little faster.

Warning

If you transfer balances and close those accounts, make sure that you tell the creditors to list them as closed by the customer. Otherwise, a future lender may think your account was a settlement or charge-off by the creditor.