Consumers burdened with credit card debt may be tempted by offers for credit consolidation loans that are frequently advertised, but they should be sure they understand the loan before choosing what could be a risky option.
Credit consolidation loan basics
Debt consolidation loans can be convenient, because they wrap multiple credit card or other debt payments into one loan. Some consumers opt to pay off their car loan and all charge card or revolving credit debt with a debt consolidation loan.
Tips for debt consolidation:
- Before choosing a loan, make sure you have a complete list of all your debt, including the monthly minimum payment for each creditor and the interest you are being charged. Total the monthly minimum payments and the balances owed so you have an accurate picture of your debt situation.
- A credit card payoff calculator can help you estimate how long it will take you to eliminate your debt if you decide to continue making payments on your own. The calculator can show you the difference between making the minimum payments and paying extra to reduce debt faster.
- Compare the interest rate, monthly payments and all fees on credit consolidation loans. Shop around to see if you can find a better interest rate. If you have substantial debt or a low credit score, you may have to pay a higher interest rate than is advertised.
- Compare the total payments you must make now with the total debt consolidation loan payment to make sure this is truly a better deal.
- Credit card companies have added a feature to their bills which shows how much you need to pay in order to get out of debt within three years. Check that payment against your potential debt consolidation loan payment to see which one will get you out of debt faster.
Credit consolidation loans may look like a quick fix for credit card debt problems, but the savvy consumer knows that a little due diligence is required before they sign on for a new form of debt.