Credit Card Debt Vs. Consolidation Debt

When a person takes on too much credit card debt, particularly from multiple credit cards, he may attempt consolidate the debt. When a debt is consolidated, a lender purchases a borrower's outstanding debts and issues his new loan. This loan will be equivalent in size or larger than the debt that the lender purchased. While there are advantages to consolidating debts, a debtor may also find some drawbacks over owing credit card debt.

Credit Card Debt

When a person charges purchases to a credit card, he is essentially drawing money against a line of credit. The person will be obligated to pay back this money within a certain period of time, in addition to paying interest on the principal of the loan. If the person doesn't pay back the loan on time, he will likely be hit with penalty fees and may be liable to pay a higher rate of interest on the principal.

Consolidation Debt

When a person consolidates his debts, he is switching a number of small debts for a single large debt. Generally, to make payments more manageable, the size of the payments that the borrower must pay on this consolidation loan are smaller. However, the borrower is generally required to pay a higher rate of interest on the loan or else pay a larger amount of money, albeit spread out over a longer period of time.

Advantages

The total amount of money that a debtor will pay on a credit card debt, if he pays the loans on time, is less than he will pay if he consolidates the loans into a single payment. In addition, the debtor can often continue to draw money against these lines of credit while he pays his debts back. The advantage of consolidation loans is a smaller payment size and the simplicity of paying only one lender.

Drawbacks

Debtors who take on consolidation debts are, in nearly all cases, required to pay a larger amount of money to the party issuing the new loan than they would to the credit card companies to whom they owed the original debt. In addition, just as with credit cards, consolidation debts may carry steep penalties for late payments. While consolidation debts may be simple, the terms of the loan are not necessarily more generous that those offered by credit card companies.