Is it a Good Idea to Consolidate Credit Card Debt Into a Consumer Loan?

A lot of people would rather consolidate all their credit card debts in one place to do away with multiple due dates, interest rates, minimum payments and other hassles. If you qualify for a consumer loan, this could prove to be a good move for your sanity as well as for your credit score. But there are potential drawbacks.

Interest Rates

Depending on your credit, consumer loans can have much lower interest rates than credit cards, especially if you've missed a payment or two and your card rate has hit the default rate, which can be as high as 29 percent. On the other hand, if you've missed many payments, your credit score might not enable you to get the lowest rates. Find out the range of loans at a bank or credit union you do business with and calculate what the difference in interest rate might be. If the difference is negligible, moving your debt won't cost you and still might give you peace of mind.

Credit Ratings

The Fair Isaac Corp., which calculates credit scores, uses a complex mathematical matrix of information about the kinds of credit you use, the length of your credit history, your payment history and your credit utilization --- meaning the size of your balance vs. the amount of credit you've been extended. According to MSN Money, it looks more kindly on debt owed through an installment loan than it does credit card debt. So moving your debt to an installment loan could help. On the other hand, since old credit is considered more favorable than new loans, it could hurt.

Benefits

With a consumer loan, you owe one amount with one interest rate and it's due every month at the same time. Therefore it's easier to budget that payment every month. There's no variable rate like there is with some credit cards and you know exactly by what date it will be paid off. So there's more peace of mind.

Risks

If you consolidate your credit card debt onto an installment loan, however, you should cut up your cards, or at least put them away where you won't easily access them. Don't cancel your accounts, because that can hurt your credit rating. Just make sure that once you've freed up those cards and added a consumer loan, you don't get tempted to use them before the loan is paid off.