Credit Card Debt Consolidation
With credit card debt such a common problem, there is a very large market in consolidation loans. You cannot help to have seen (whether you are in debt or not) many advertisements for debt consolidation loans, either in newspapers or online, or through the mail.
These loans will enable you to consolidate all your credit card debt, allowing you to have just one monthly payment. This is a major attraction for many people, and it is understandable that most people with multiple credit card and other debts will either consider, or take out, a consolidation loan.
An Example Of Credit Card Debt Consolidation
If you are not sure about how credit card debt consolidation works and how it is beneficial, then maybe the following illustration will help you.
Credit Card |
Outstanding Debt |
Monthly Interest |
Monthly Interest |
Minimum Monthly Payment |
Minimum Monthly Payment |
$ |
% |
$ |
% |
$ |
|
| 1 | 2500 | 1.25 | 31 | 4 | 100 |
| 2 | 2000 | 1.5 | 30 | 5 | 30 |
| 3 | 3500 | 2.00 | 70 | 5 | 175 |
| 4 | 2000 | 1.75 | 35 | 5 | 100 |
| Total | 10000 | 166 | 405 | ||
In the above example, there is a total credit card debt of $10,000, with an average monthly interest of $166, and a minimum monthly payment of $405. This means that, to keep a clean credit record, the credit card debtor needs to make $405 in payments every month and on time or early.
The average annual interest on those 4 credit cards is very close to 20%. Now, let us assume you can get a loan for credit card debt consolidation purposes, and that the annual interest rate is 10%. You could take out a 5 year term loan, and pay off the entire credit card debt of $10000 with repayments of $212.47.
That illustration makes obvious the attraction of a credit card debt consolidation loan. However, you may not get a loan at 10% annual interest. To work out loan repayments for other interest rates, please use the loan calculator.
It is a good idea for you to set out a similar table to the one above, setting out your credit card debts, % monthly interest rates, monthly interest, minimum monthly payments and their %. You will find that an illuminating and useful exercise if you have not done it already.
Other Points To Watch With Credit Card Debt Consolidation Loans
While credit card debt consolidation can play a useful role in managing your finances, there are a few points to bear in mind before you make any commitment to a new loan:
1. Loan consolidation will be noted on your credit report, and that may have an adverse effect on any future loan application. However, if you can keep up the payments and pay off the loan on time, then that will be good for your credit standing in 5 years' time, or after whatever term you choose.
2. It can be a temptation to immediately start to run up credit card debts again, once you have paid off balances with the consolidation loan. It is wise to start afresh with a new budget, and no credit cards. For convenience, use a debit card. That's all you need.
3. Consolidation loans can vary greatly in interest rate charges. Shop around and get the best deal, and your underlying assets will be the better for it.
4. If you take out a secured loan (second mortgage) remember you can lose your home if you do not keep up the repayments.
On balance, though, if you have multiple credit card debts, a well timed consolidation loan can be a useful way to get your finances under control, and save you interest charges. Never forget, those interest charges eat away at your personal assets
It is wise not to jump into a consolidation loan without doing some research. You will find debt consolidation resources here to help you make the right choice for your financial circumstances.