When credit card companies charge high interest rates on the amount you charge, it's very easy to charge more than you can afford to pay back. If you're late with a payment, you'll have to pay late fees on top of your monthly payments and interest.
When credit card debt and other types of debt get out of hand, many people look for ways to improve their finances. With so many options, like debt consolidation loans, self-debt reduction, debt management plans, credit counselling services, and even bankruptcy, it can be hard to figure out which one will help you pay off your debts the fastest.
Debt consolidation is more than just getting a loan to pay off all your debts. Some types of credit counselling and balance transfers are also ways to consolidate debt, so it's important to look at all of your options carefully to find the one that will work best for your finances.
Debt consolidation and credit counselling
Many credit counselling services offer programmes to help you manage your debt so that you only have to make one monthly payment. Even though they don't pay off your debt in a single loan, as a consumer you make a single monthly payment to the credit counselling agency. The agency then pays your creditors on your behalf, so in terms of your monthly payments, it's very similar to paying off your debts with a debt consolidation loan.
Transfers of Money
If you have a number of credit cards with high interest rates, it can be helpful to move all of your balances to one card with a lower rate. Just make sure to pay attention to the special offers that come with credit cards with lower interest rates so that you can get a long period of low (or even no) interest. Also, make sure to check what your interest rates will be after the promotional period is over to make sure they won't go through the roof.
This method of consolidating debt should only be used once in a while to make it easier to pay off a few credit cards. It shouldn't be used often or by people with a lot of monthly debt.
Loans for combining your debts
Most of the time, people with multiple credit card accounts or unsecured loans can benefit greatly from getting a new loan that is big enough to pay off all of the smaller accounts. The debt consolidation loan can be another unsecured loan from the bank, or if you own a home or car, it can be a secured loan. Secured loans are always a little risky because if you can't make the payments, the lender can take your collateral (like your home or car). Think carefully about this option before signing the papers!
How to Decide Which Debt Consolidation Plan to Use
When deciding whether or not to consolidate your debts, the most important thing to think about is whether or not your new monthly payment will save you money on your monthly budget for expenses and whether or not it will save you money on interest and fees over the long term. Most of the time, consolidating your debts will save you money in the long run and help you pay them off faster, whether you do it with a loan, a balance transfer, or a debt management company.
