If you have high interest rates and balances on your credit cards, debt consolidation loans may look like an appealing option, since most debt consolidation companies advertise low interest rates on their loans. However, it's vital to understand how debt consolidation loan payments compare with your existing payments once you receive an interest rate based on your credit score before accepting a loan offer. Once you take on a loan, you have to commit yourself to staying out of debt to keep from further damaging your credit score.
Debt consolidation loans wipe out the balances on your credit card accounts. When you get a debt consolidation loan, you make one monthly payment instead of multiple payments to your credit cards. You must have an excellent credit score to take advantage of the very low interest rates advertised by debt consolidation companies; however, consumers in need of debt consolidation often do not have high credit scores and must accept higher interest rates than those advertised.
Who It Benefits
Those who benefit from debt consolidation are individuals who can get lower interest rates from the loan than from their credit cards. Add up your current payment and fees and look at how they compare with the rate that the debt consolidation loan offers you to figure out if you'll actually save money. Debt consolidation is also beneficial to those who want the convenience of making one payment per month.
You must be fully committed to paying off your debt if you take advantage of credit card debt consolidation. Since the debt consolidation loan brings your credit card balances to zero, you may fall into the trap of spending on your cards again, sinking you further into debt because you'll then have to make the lump payment to the loan as well as individual payments to your new credit card balances.
Your credit score may be negatively impacted by taking on a debt consolidation loan because the loan qualifies as an inquiry to a new line of credit. Additionally, if you succumb to the temptation of continuing to spend on your credit cards, you will find yourself with even more debt, which also weighs down your credit score.
Joy Uyeno has been writing about travel, food, fashion, culture and finance since 2005. For three years she wrote a column for the "Honolulu Star-Bulletin" aimed at young and first-time travelers. Her writing has appeared in several local and national publications, including the 2008 anthology "Honolulu Stories." She holds a Master of Arts in writing and publishing from Emerson College.