When credit card debt becomes overwhelming, it can be tempting to ignore payments completely. Before you panic, you need to find a way to better manage the financial mess. One solution you might be considering is consolidation, but consolidation loans should only be considered only if you’ve already tried all other avenues to get out of debt.
Debt consolidation allows you to acquire a loan that pays off multiple debts and rolls them into one payment. In other words, you are borrowing money to pay off other borrowed money, and instead of having several smaller sharks circling you, now there’s only one very large shark. Although using debt as a means of paying off other debt may be your best option, it should never be done without serious consideration of the potential ramifications.
The first problem associated with debt consolidation is managing interest rates. Debt consolidation offers usually promise low rates initially, but the rate you receive is dependent upon your credit rating, similar to any other loan. The new interest rate may not be any different than what you are already paying for the individual debts, and if this is the case, the consolidated loan is not worth your time. Even in circumstances where the interest rate is lower than what you are currently paying in the beginning, because the consolidated debt is larger and often extended over a number of years, it make take longer to pay off. The longer you are making payments, the more interest you will be paying for the money you’ve borrowed.
Consolidating your debt is the right answer in certain circumstances: If you’re not able to use a snowball payment or make larger payments to start paying off the debt, and you’re going to be paying on these accounts forever, a debt consolidation loan maybe the best route to go. If you’ve defaulted on the debt you’re trying to consolidate, and your interest rate has gone up to 20 or 30 percent, getting a consolidation loan at 10 or 12 percent will definitely be worth considering.
Consolidation, however, may have a negative impact on your credit rating. Not only will your credit report reflect that you have opened a new line of credit, which may lower your score, but it will also show the open credit available from what you’ve paid off, which can also lower your score.
The biggest danger, however, is that you will pay off your credit cards with a consolidation loan, then use the cards again, and end up with twice as much debt as you had before. Since closing the cards can negatively impact your credit score, because you lose your credit history, you have to be very, very disciplined in order to truly benefit from consolidation.
Debt consolidation loans are not for everyone. There is a lot of risk, and the last thing you need is more debt to manage. A safer course of action may be to utilize the many Ovation Tools available that will help manage your debt and reestablish good credit. Organization, discipline and proper spending habits can eliminate the need for a consolidation loan.