Pros and Cons of a Credit Card Debt Consolidation Service

Pros and Cons of a Credit Card Debt Consolidation Service

“Be careful about credit card spending.”

“Do not spend more than you can afford.”

These words can sometimes be easier said than done. There are many people that follow these principles but sometimes circumstances can lead to huge debt that becomes unmanageable. Is a credit card debt consolidation service the solution to this problem? What are the advantages and disadvantages of credit card debt consolidation service? How do you find the right debt consolidation company?

What is a debt consolidation program?

This is a loan that will pay off your loan. You will be paying the debt consolidation company. There are many ways these debt consolidation companies work. The popular method is to take payments from you and distribute to your lenders (credit card companies). All your loans will be consolidated into one payment usually withdrawn directly from your bank. These programs make the borrowers life easier. There are some advantages and disadvantages to debt consolidation programs, which will be discussed later.

As a rule of thumb, if you have many different credit card payments with high interest rates, then debt consolidation can help you manage your debt with only one bill and lower interest rates. These debt consolidation companies negotiate a lower interest rate. If your interest rates are around 30%, the debt consolidation programs can reduce your interest rates to between 12% – 18%. These programs require a monthly admin fees, which is usually below $50.

Finding a good debt consolidation program / company

Finding the right debt consolidation company is the key to successfully consolidating your debt. There are a few scams in this business so it is best to proceed cautiously to avoid debt consolidation traps.

1. Word of Mouth: Ask your trusted friends if they have been in any debt consolidation programs or know of anyone who has been in these programs. This is the best option. A lot of guesswork is removed and you can feel secure.

2. Mailers and telemarketing: Many times mailers and telemarketing phone calls that you get is because your debt situation is such that it fits the requirement of their enrollee. They already have some information about you and also are interested in enrolling you. When you receive mail from a debt consolidation company, look for their website and research that company. This company must be in good standing with the Better Business Bureau (BBB) and must have been in existence for a few years. There are non profit companies who do very good job. If you receive a phone call, never enroll in the first phone call. Get all the details such as the websites and phone number to call. Similarly as with the mailers, research the company.

3. Internet search: Search the internet for good debt consolidation companies both non profit and profit companies. Again research the company background.

4. Ads on Television: Some of the bigger companies run advertisements on TV. These are established companies but yet research them as mentioned earlier.

There are a few advantages and also disadvantages of debt consolidation programs. You have to find a balance between them. The fact is that credit card debt consolidation companies do help in paying off your debt.

Advantages of a Credit Card Debt Consolidation Service

1. Easier to manage: After you enroll in the debt consolidation program, you will have a relief from making monthly payments. Usually, the company will withdraw the money directly from the bank and you will not have to worry about late payments.

2. Lower payment amounts: Your monthly payments will be lower because you are paying off the loan over a longer duration.

3. Lower rate of interest: This is one of the biggest advantages for many borrowers. Some of the debt consolidation companies bring down the interest rates too much lower rates than the current ones. This can save a lot of money for the borrower.

4. Debt Management: Many of the good debt consolidation give lots of tips and suggestions on managing your debt. They draw out a plan on debt management. These tips are invaluable.

Disadvantages of a Credit Card Debt Consolidation Service

1. Higher Payment: If the payments are made over a longer duration of time (more number of the years), then you will end up paying more in the long run. One way to avoid this if your financial situation has improved, then you can pay off larger sum of money. Most of times there be no penalty for paying off the loan sooner than the agreed up on duration. This is something you can ask before enrolling into the debt consolidation program.

2. Cancellation of credit cards: If a credit card payment is made through a debt consolidation program, then that credit card account will be closed. i.e., that particular credit card is no longer active and you cannot use it anymore.

3. Negative impact on credit score: Although this is questionable; enrolling in a debt consolidation program can decrease your credit score. There is evidence to the debt consolidation’s negative impact on credit score. Even credit repair companies mention that it is difficult to increase your credit score if you are currently enrolled in a debt consolidation program. It is possible to raise the credit score after you have paid off the loans and are not currently enrolled in the debt consolidation program.

Just to recap – when should you consider enrolling into a credit card debt consolidation? Here are some of the criteria that need to be considered. If you are paying around 30% interest rate on a credit card, you have many credit cards, you are unable to make or barely able to make the minimum monthly payment, you are unable to manage all the payments etc., you must consider credit card debt consolidation. Review the advantages and disadvantages mentioned above and decide. For a short duration of time, if you can live with the disadvantages, then consider credit card debt consolidation. Debt consolidation can get you out of your current debt problems but if you do not change your spending habits, then you will be back in debt trouble. So the permanent solution to debt problems is to change your spending habits. Spend only what your can afford. Pay off debt on time.

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