An opportunity to pay off a raft of high-interest debts with a single monthly payment — at a lower rate of interest — can be an attractive proposition. This is why a lot of people consider debt consolidation when they have a lot of financial obligations.
The upsides are the possibility of saving money overall, having fewer bills to pay each month, and getting out of debt sooner. However, to make sure it goes that way, there are some things to consider before doing a credit card consolidation — or any type of debt consolidation really.
Your Credit Score
With every form of consolidation — save one — you’ll need a good credit score to make the consolidation worthwhile. You’re going to need to qualify for a loan with a lower interest rate or a new credit card with a much larger limit. In most cases, this means you’ll need at least a 670.
With that said, if you sign up for a debt management program, your credit score won’t matter because you’re not taking on additional debt to resolve your situation. However, going with this strategy can take longer and be more expensive than the other methods.
Can You Afford The Monthly Payments?
A balance transfer is one popular tool for credit card debt consolidation services for bills. With it, you’ll combine the outstanding amounts on as many of your credit cards as possible and shift them to a new card offering a zero percent interest rate for the first 12 to 18 months of the agreement.
This means you’ll pay those debts off without incurring any additional interest — if you can pay the transferred balance in full within that 12 to 18 month period. This could create a hardship if you’ve only been making minimum payments on the cards you have now.
Meanwhile, if you can’t pay the balance in full during the introductory period you could be hit with an even higher interest rate than you had before, on the entire transferred balance, going all the way back to the date you signed the deal.
Which Method to Employ
We’ve already mentioned debt management and balance transfers. The other methods most often employed are personal loans and home equity loans or lines of credit. Each of these tools has its pros and cons, the most significant of which are spelled out at the Consumer Financial Protection Bureau’s site.
Do You Stand to Gain Savings?
Consolidation isn’t worth the risk if you won’t see any financial gains.
The whole point of credit card debt consolidation is solving your debt problem for less money than paying it off in a normal fashion. As we mentioned above, you’ll need a strong credit score to garner savings with any of those loans.
However, you might save money with debt management without taking on new debt. Management program counselors negotiate lower interest rates and fee waivers on your behalf to help make paying off the debt easier. You’ll then make payments to the counseling firm, which in turn will pay your creditors.
Why You’re Indented in the First Place
Debts can creep up on you for a lot of different reasons — many of which are beyond your control. Encountering a serious medical situation can set your finances back quite a bit. Losing a job can make it hard to pay your bills too.
On the other hand, if the situation is entire of your own making — be honest with yourself — you’ll either have to change the way you roll or forget about consolidation. Going ahead with one and falling back into the same spending habits will only make your problem worse.