Evaluating the Benefits and Pitfalls of Credit Card Consolidation

Credit card consolidation involves taking out a loan to pay off all of your credit card accounts. Then you pay on the new loan in order to eliminate the debt. While this strategy can work, there are drawbacks to using it as well. Here are some of the benefits and pitfalls associated with credit card consolidation. 


  • Focus on the debt--By consolidating your debt into one central location, you can focus on it more easily. Many people that are in credit card debt have several different accounts that they pay on. When you have four or five credit cards all with different interest rates, it is sometimes difficult to know which card to pay on. When you consolidate your credit cards, you can put all of the extra money that you get into paying off that one account. It makes your decisions a lot easier, and may thus help you pay the debt down faster. 
  • Lower interest--When you get a credit card consolidation loan, you will often be able to get a good interest rate as compared to the credit card interest that you were paying. Credit card interest is one of the most expensive forms of interest around. Therefore, it will cost you much more money to leave your balances on the cards as a result. By consolidating your credit cards, you can save money that could be better used in other ways. 
  • Faster payoff--When you are paying credit card interest on several credit cards, it could take you many years to pay off. If you are just making the minimum payment every month, it might take you 20 or 30 years to pay off. Therefore, by reducing your interest rate with a consolidation loan, you will be able to pay off the debt in a fraction of the time. 


  • Credit damage--While it seems like a good thing to you when you pay off a lot of debt at once, it will not necessarily be good on your credit report. When you get rid of all of your revolving accounts at once and stop using them, it can negatively affect your credit as a result. You have to use your credit in order to keep it. Therefore, if you just get rid of it all at once, the credit bureaus will lower your score as a result.
  • Difficult to obtain--While credit card consolidation might seem like a good idea, it is not available to everyone. Many times, a person's debt load is too high to qualify for a loan big enough to put all of his credit card balances on. In that case, he cannot consolidate his cards' debts. 

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