Should You Consolidate Your Credit Card Bill?

Consolidating credit card bills can be a wise financial decision, but there are a number of problems that consumers should be aware of before consolidating. Even if a consumer has made the decision to consolidate, there are different ways to consolidate the debts. Every consumer should carefully consider which option is best to meet his particular needs.

Why Consolidate

There are two primary reasons that most consumers choose to consolidate credit card bills. The first is convenience. By consolidating multiple credit card bills into one, consumers only have one bill to pay which makes it easier to track the payments and to assure on-time payment. The second reason is to save money. Credit cards typically have high rates of interest, while many options for debt consolidation offer lower interest rates that will result in significant savings over time.

Risks of Consolidation

The primary risk of consolidation is that the consumer will convert the credit card debt into another form of debt and then simply start using the credit cards and rebuilding credit card debt. The consumer then ends up with more debt than when they started the consolidation process. The other risk is that by converting the unsecured credit card debt into secured debt, such as a home equity loan, the consumer's home will be at risk of foreclosure if he cannot pay the debt due to unemployment, health problems or other financial difficulties.

How to Consolidate

Consumers have a number of options to consider when consolidating credit card payments. The use of a home equity loan is one of the more common choices. A home equity loan is a loan borrowed against the equity in the consumer's home. For example, if the consumer's home is worth $200,000 and $120,000 remains on the mortgage, there is $80,000 in equity. Other options include a second mortgage, a personal loan and an unsecured debt consolidation loan. Consumers take the money from the loan and pay off the credit cards, resulting in one monthly payment to the new loan. For consolidation to make financial sense, the new loan must have a lower interest rate than the average rate of the other debt.

Alternatives

Credit counseling is one alternative to traditional credit card consolidation. In credit counseling, the counselor will work with the consumer and the credit card companies to reduce the interest rates and payment amounts to make the debt more manageable. Consumers will then make one payment to the counseling agency. The agency using the one payment from the consumer to make the separate payments to the credit card companies. Another option for consumers with good credit is to open a new credit card account with a zero or low interest rate and transfer the credit card balances to the card. This option allows all or more of the credit card payment to apply directly to the debt, helping the consumer pay off the debt more quickly.