Credit Card Debt Consolidation
If you are struggling with a lot of debt, you may have considered getting some type of debt consolidation loan. While debt consolidation is a viable option for many, it can be costly and may not completely resolve your financial challenges
At DeMarco•Mitchell, PLLC, we have over 40 years of combined experience helping people end financial turmoil. If your debt is causing you too much stress and affecting your quality of life (too many sleepless nights) we can explain your options such as debt consolidation or even bankruptcy.
At the most basic level, debt consolidation is the simple action of grouping all of your bills into one combined debt. For example, if you have five credit cards, you can use debt consolidation to combine them into one consolidated loan. Debt consolidation can be a legitimate tactic for managing your finances, but only if the conditions are right.
∎ Debt Consolidation Loan: You would get a loan from a bank or a credit union, in which case the bank would agree to consolidate all of your debts into a single new loan (usually credit card balances). The key benefits of a traditional debt consolidation loan is a lower monthly payment and a lower interest rate. A debt consolidation loan can help you to reign in your high credit card balances and their attendant high interest rates.
∎ Balance Transfers: Taking advantage of various credit card balance transfer programs is a type of debt consolidation. By utilizing the credit card balance transfer option offered by many banks you will be able to move some or all of your credit card balances to a single new card. While you will often reap the rewards of a 0% introductory interest rate for a period of 12 to 18 months it is not without a cost. That cost is usually at the expense of your credit score. Your credit score will often be impacted when one or more credit card balances exceed 30% to 40% of the credit card line of credit. Additionally, your credit score will be impacted by the increased number of inquiries. In short, proceed with caution, monitor your credit and track the deadline for the introductory interest rate.
∎ Home Equity Loan: If you are a homeowner, this might appear to be the best alternative. Better terms than a traditional unsecured debt consolidation loan and none of the risks and monitoring requirements associated with the credit card “balance transfer” game. The operative word, however, is “secured.” A home equity loan is secured by a second mortgage on your homestead. This is an alternative we will only very rarely recommend. It is a rare situation where it is advisable to take unsecured credit card debt and secure it by your homestead. Further, more often than not, persons who enter into home equity loans in order to consolidated credit card debt often fail to change their financial habits. As a result, many will often again incur very high credit card balances, but now with the added burden of a second mortgage from the prior home equity loan.