When you are tackling multiple credit card bills every month, credit card consolidation may seem like water for a fish. But, it can be a bad option in certain circumstances. In this post, we will discuss them and find out when credit card consolidation is a bad option and how you can turn into a good one.
When you should not consolidate credit cards
Credit card consolidation can be a bad option at certain times. Let us find out when and how.
When you do not know the reason behind your debt problems
Credit card consolidation can help you to get out of debt. However, if you do not find out the reason why you got into debt problems, you can make the same mistakes and get into financial trouble yet again.
If you keep on spending just like before, then consolidating credit cards can never be a good option for you. Not analyzing the reasons behind your debt problems is a fatal error. Unless you change the habits or work on the reasons that pushed you towards debt, you can never enjoy a peaceful financial life.
Focus on the reason why you are in credit card debt. Is it because you were spending more than your affordability? In that case, you have to learn to live as per your means first. Otherwise, credit card consolidation can never help to solve your problems.
When you qualify for a consolidation loan with a long repayment term
Credit card consolidation loans are not free. Most consolidation loans come with interest rates, origination fees, and other charges. You have to pay interests and fees until the completion of the loan term.
The fees of credit card consolidation loans are usually lower than credit cards. So, that helps you to save money. Some loans even come with a very low-interest rate. But there is a catch. These loans have a long repayment term. When the loan term is too long, then even if you have to pay a low-interest rate, you will eventually pay more on interest payments in the long run.
When there is no specific pay-off date
Obviously, you would not like to make payments on your debts for an indefinite period. Usually, credit card consolidation loans come with a specific pay-off date. However, loans that do not come with a pay-off date are too risky. You will keep on making payments forever, and your journey towards debt freedom will only become more difficult.
When you opt for a credit consolidation program, credit counselors give you an affordable payment plan. You have to pay a fixed amount every month to counselors. But they also give you the timeline by which you can get rid of debt.
Usually, in a credit consolidation program, you can expect to get out of debt within 3 to 5 years. So, you know when you will get out of debt, and you can plan your financial life accordingly.
When you cannot lead a frugal lifestyle
If you keep making useless expenses and pile up fresh credit card debt, you will get into financial problems again. While a credit card consolidation program helps to free up cash, it won’t work if you can’t lead a frugal lifestyle.
Unless you lead a frugal lifestyle, it is not possible to save money. And if you do not save money, you cannot make the required monthly payments or extra payments on your new repayment plan.
Piling up fresh credit card debt while making payments on a credit card consolidation plan will not help you enjoy a debt-free life. You will only exhaust your credit limit, increase your outstanding balance, and lower your credit score.
You want to borrow a consolidation loan without a good credit score
It makes sense to borrow a credit card debt consolidation loan when you can save thousands of dollars. If you are planning to borrow a loan or apply for a balance transfer card to consolidate credit card debt, you need to have a good credit score.
How much credit score do you need? A credit score between 670 and 700 is considered a good one. However, if your credit score is below 670, then lenders may not be ready to offer you an unsecured loan at a low-interest rate. They will charge a high-interest rate on your consolidation loan, or they will offer a secured loan.
It is a loss for you in both cases. A high-interest consolidation loan will not help you to save money. Again, the interest on a secured consolidation loan is low, but you may lose the collateral in the event of loan default.
For example, a home equity loan is a type of credit card consolidation loan. But you will qualify for it only when you have equity in your home. If you do not have sufficient equity in your home, you will not be eligible for this type of loan. Furthermore, if you fail to pay off the home equity loan on time, lenders will foreclose your property. So, you will lose your home to pay off your credit card debts. Are you willing to take that risk?
When you cannot pay off the balance transfer card within the promotional period
Balance transfer credit card allows you to consolidate credit cards at a 0% interest rate. It is a good way of consolidating multiple credit cards. However, if you do not have the money to pay off the balance within the introductory period, it is a bad option.
After the introductory period is over, you have to pay double or triple the interest rate. There will be no savings.
When you do not research the credit card consolidation company
When you are under stress, it is easy to fall prey to fraudulent credit card consolidation companies and make a wrong decision. Fraudulent companies will take money from you without offering any solution. They will charge upfront fees and monthly fees without negotiating with your creditors. As a result, you will get into acute debt problems instead of getting rid of them.
How can it be turned into a good option?
Credit card consolidation can help you to save money when used judiciously. Here are a few ways to do just that.
Save money and make payments on time: Lead a frugal lifestyle to save money and make monthly payments to the credit card consolidation company. If possible, make extra payments to get rid of credit card debt fast.
Read the fine print: Be it a credit card consolidation program or a loan, read the fine print of the agreement. What if you fail to make monthly payments? Are there any hidden charges? It is better to have a clear picture before you commit to anybody.
Educate yourself: Educating yourself about the credit card consolidation process and the traits of a good company can help you to get the right solution. Download a credit card consolidation app and find out how the process works. Check out the reviews to know what customers have to say about it. You will get a good idea from there.
Choose the best program: Consolidation loans and balance transfer credit cards are good as long as you have a good credit score. When you owe money to credit card companies, chances are high that you already have a low credit score.
When you have a low credit score, it is best to opt for a credit card consolidation program. You can qualify for it with a low credit score. Unlike balance transfer credit cards, you do not have to pay the balance within 12 to 18 months. You do not have to pay high-interest rates also.
Clear balance within the introductory period: If you are taking out a balance transfer credit card, pay off the outstanding balance within the promotional period to avoid paying high interest.
When settlement is a better idea than consolidation
Credit card settlement is a better option than consolidation in the following scenarios:
You want to lower your outstanding balance: Instead of reducing interest rates, if you wish to cut down your outstanding balance, then credit card debt settlement is a better option for you. In this credit card debt relief plan, you can negotiate with creditors to lower your payoff amount significantly.
You want to get rid of debt with a lump sum payment: In a credit card debt settlement plan, you can get rid of your financial obligations with a lump sum payment. The process is fast and quick. In a credit card consolidation program, you may have to wait between 3 and 5 years.
When you combine credit card debt with a consolidation plan and save more than $600, you have to pay tax to the IRS. So always keep this fact in mind before you consolidate or settle your debts. Do not think that credit card consolidation or credit card debt settlement is a bad option just because you have to pay tax. The fact is you have to pay tax whenever creditors forgive a portion of your debt. You cannot escape it.