Many people consider credit card consolidation when they become overwhelmed with their credit card payments. Consolidation may also help to reduce interest rates and make it easier to get out of debt and stop the credit card cycle. However credit card consolidation does have it risks and is not the best choice for every situation.
Consolidation Loans
A consolidation loan is when you take out one loan to pay off several smaller loans. Generally the interest rate will be lower, and a good consolidation loan will offer a fixed rate that will not vary with the market. A consolidation loan can be a signature loan with no collateral or it can be tied to something such as a car or your home as a second mortgage. There terms of the loan may be adjusted, which can lower your monthly payment by extending the life of the loan.
Benefits of a Fixed Interest Rate
The biggest benefit of a consolidation loan is locking in a fixed rate. This guarantees that your interest rate will not go up despite market conditions, unlike most credit cards. Additionally you can usually qualify for a lower interest rate than most credit cards. Paying less interest will save you money and means that more of your monthly payment goes towards the principle balance instead of to interest.
Finding Consolidation Loans
There are many different places to find a consolidation loan. The best places to work with are your local banks or credit unions. Begin applying there to find the best interest rates and terms for your loan. Companies that advertise on television or in the mail often have higher interest rates and penalties if you are late on a payment. They work to attract people with a poor credit history and charge higher rates because of it.
Dangers of Consolidation
Although debt consolidation can reduce your monthly payments and help you get a handle on your debt, there are risks involved. If you take a second mortgage or tie the debt to your home, you are in danger of losing it if you miss any payments on your home. For this reason, do not ever pay off credit card debt with equity you cash out of your home. Another problem is that many people continue to use their credit cards after they have paid them off and find themselves in a similar situation in a few years, only they have the consolidation loan on top of their credit card debt. If you take a credit card consolidation loan stop using your credits completely.
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