Risks And Rewards Of Consolidating Credit Card Debt

Debt consolidation can be an effective way of getting your finances to a better place. But like all things, there are both benefits and drawbacks to consider. Here are some of the risks and rewards of consolidating credit card debt.

Lower Your Interest Rate

Interest rates are one of the most important factors to consider when looking at loans. This is especially true when it comes to credit cards, which are notorious for coming with exceedingly high interest rates.

You need to care about interest because it affects the amount you have to pay back on borrowed money. A few percentage points can make a difference of hundreds, if not thousands, of dollars. With that in mind, here are two distinct ways consolidation can lower your credit card interest.

First, if you’re doing a credit card balance transfer, you might qualify for a low introductory rate. This is offered by many credit card companies to entice consumers to use their products. It’s possible to get as low as a zero-percent rate for as long as 18 months when you complete a balance transfer.

Additionally, debt consolidation in general is a way to potentially lower your overall interest rate. Combining multiple lines of credit, the rate on the new loan can be lower than the effective net rate of the previous loans on their own. It’s important to know how your interest rates will be affected before consolidating debt.

Simplify Your Repayment

If you have the choice between paying off a long list of debts versus just one, the second option is pretty obviously a better choice. Debt consolidation simplifies your life by taking a bunch of credit lines and turning them into one. You’ll never have to worry about forgetting an account or due date again.

Potentially Improve Your Credit Score

Unlike debt settlement or bankruptcy, which can damage your credit, you have the opportunity to improve your credit score with debt consolidation. While you might get a temporary ding from closing old accounts and opening a new one, this should be more than offset in the long run if you pay on time. About 35 percent of your credit score is based on payment history and 30 percent is reflected by how much you owe. Consolidation can help you knock it out of the park on both fronts, which can eventually boost your credit ranking.

Various Options for Consolidating Credit Card Debt

There are several ways to consolidate credit card debt. If you don’t have a high enough credit score for a balance transfer, debt consolidation can also be done through a home loan or a home equity line of credit. It’s important to note, however, you need to choose the right organization to help you consolidate debt.

Let’s dig a bit deep into that with some of the potential downfalls of consolidation:

Not All Companies Are Honest

This needs to be out in the open as much as possible. It doesn’t matter what you’re trying to do, if personal finances are involved, someone wants to take advantage of your position. This is especially true if you’re struggling with debt, as scammers see people in distress as easier targets. Research a company before you engage its services. A long list of bad reviews should be enough evidence to turn the other way. 

There’s No Guarantee for Success

Debt consolidation works for a lot of people. But there’s absolutely no guarantee it’s going to work for you. To begin, there are lots of variables that can go awry—some within and some out of your control. You should also be wary of any agency trying to guarantee you success with debt consolidation. That’s not something anyone can do.

Consolidation Doesn’t Change Habits

Consolidating your debt can set you on the right path to healthier finances. It doesn’t, however, change your behaviors. These are things you need to address and mitigate on your own. It should be noted, you might be tempted to spend after consolidation due to prematurely feeling you’ve beaten debt. However, it’s essential to stay focused until the process is complete. Falling back into old habits will only hurt you.

There are lots of positive aspects to debt consolidation. But it’s also important to understand the risks so you can make an informed decision about what’s best for your finances.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.