Consolidating credit card debt is often touted as the perfect way to avoid bankruptcy and repair your credit rating. Consolidating your debts into one monthly payment, which ideally has a substantially lower interest rate than what you currently pay, is often the result of a debt consolidation program. However, consolidating your debt requires time, and most programs require an application process for you to see if you’re approved first and that in turn may lead to a difficult credit check at a later date that may drop your credit scores significantly. So it’s not always the most practical option.
You may also be wondering how this type of debt relief affects your credit scores. Consolidating your debts into one payment lowers the total amount of credit available to you, but it doesn’t affect your FICO scores in a significant way. In fact, sometimes it may actually hurt your credit ratings, depending on the situation. Credit card consolidations that have caused people to lose their homes or have had trouble getting new credit cards after consolidating have typically had some negative impact on their credit ratings. If you have good credit and are considering applying, it’s important to do your research and know what the potential consequences might be.
One situation that could lead to problems if you decide to go through with a credit card consolidation loan is when you’ve been making large monthly payments that continue to be higher than the amount of money you currently owe. This can happen if you have a lot of late fees, or if you’ve missed payments on accounts. When you consolidate, you often take all your high-interest credit card debts and roll them into a lower-interest loan. The problem is that your monthly payments will likely go up because the new loan has a much higher interest rate. You’ll end up paying back more for the new loan than for the individual loans you had before.
Another issue with credit card consolidation is that some lenders will not finance it, especially if you have a poor credit rating. If you want a cash-out refinance, you’ll probably need to get a co-signer, like a parent or a friend. This helps ensure that the loan will be paid off, since if you don’t, your parent or friend will end up responsible for it. However, there are some lenders who will consider giving you a second chance. They might allow you to take out a second loan to pay off your original one. Of course, even with this perk, you should be aware that it may be harder to get approved for a cash-out refinance if your credit is bad.
Credit card consolidation can also increase your monthly payments. If you already have a lot of credit cards, you may end up paying a lot more than you’d like each month. Even if you have a low interest rate on your current cards, you can expect your monthly payments to increase as well. Also, if you have a lot of credit cards, you may end up paying an annual fee, as well as extra fees for cash-out, etc. If you consolidate all of your accounts into one, you’ll only need to make one monthly payment at a lower rate. However, be aware that you will lose the convenience of having multiple cards!
Another issue with credit card consolidation is that your credit score may decrease slightly in the process. Because you’re stretching out your payments over a longer period of time, your credit score takes a hit during that time. However, many financial situations can improve in the months and years ahead. If you’re trying to correct your financial situation, the sooner you start, the better off you’ll be. Just make sure you’re able to handle all of your monthly payments without going over budget.
As mentioned, if you want to consolidate credit card debt, there are a variety of programs available to you. Some companies are actually willing to help you reduce the amount you owe and roll it into one payment that is lower overall. However, other companies will just charge you for the program and still require you to make monthly payments.
You also need to realize that not all credit card consolidation loans are paid back in full. Many companies only offer a partial repayment plan, so that you’re able to get out of debt and rebuild your credit history. This kind of loan is usually offered by credit card companies to encourage you to get out there and start using credit again. You may not qualify for this kind of loan if your credit accounts are unsecured, but if you have secured accounts (such as home equity) this is likely the route you want to take.