Is Debt Consolidation Better to Pay Off Credit Cards Than to Borrow Money for Them?

If you start racking up a lot of debt on your credit cards, you may look toward debt consolidation as one possible solution. Before you choose consolidation, you should understand exactly what it is: Debt consolidation is simply a term used to describe a loan to pay off other loans. Debt consolidation does not do anything to decrease the amount of money you owe.

Loans

When you consolidate your debts, you use money from a new creditor to pay off debt you already owe to two or more previous creditors. Whether you obtain the new money from a credit card, bank or friends or family members, a consolidation is simply a new kind of loan. Like other loans, it too must be repaid and done so in accordance with the terms of your new consolidation loan.

Types of Consolidation

People typically consolidate credit cards through one of several means, either by using a credit card balance transfer or by obtaining some other kind of loan such as a home equity loan or personal loan. Regardless of the form the consolidation loan takes, the loan funds are used to pay off the debt you owe to the credit card company. Once that is paid off, you have to make payments to the creditor that provided you the consolidation loan.

Evaluation

Just as you would with any other kind of loan, you must evaluate a consolidation loan based on the terms associated with it. For example, credit card balance transfer consolidations typically come with introductory offers that offer very low interest rates for a limited amount of time. These kinds of consolidation loans may be beneficial if you are sure you can repay the balance during the introductory period. If not, another form of loan may be better for your needs.

Other Options

Consumers who use loans to pay off old loans engage in a dangerous habit that perpetually leaves them in debt. Without the ability to repay your debts on time, you will not be able to escape from the pressure of debt, be it in the form of credit card or consolidation debt. To truly free yourself from the pressures of debt you must be able to pay off your loans completely, and not simply move the debt from one creditor to another.