Consolidation Loans

If you have a lot of credit card debt and are starting to feel overwhelmed or like you will never catch up, you may be considering credit card consolidation. There are many options available – each with advantages and disadvantages you should be aware of. You should also understand the elements that make credit card consolidation successful so that you can get your credit life and financial situation back on track.

Credit Card Balance Transfer

If your credit hasn’t been dramatically damaged from your problems with credit card debt, one option that you may want to consider is a zero balance or low interest rate credit card balance transfer. These cards allow you to consolidate all of your credit card balances onto one card and they offer you a low or non-existent interest rate for a short period of time. During this time, you can work on paying off your credit card debts before the introductory interest rate period is over.

When looking into balance transfer options, it is extremely important that you are careful in your credit card selection. Compare all of your credit card options before actually applying. Each time you apply for a new card, you take a hit on your credit rating.

Be careful to read the fine print before transferring all of your current credit card balances to a new credit card. While the introductory interest rate may be helpful in helping you better manage your credit card debts, you must also realize that there are other fees often associated with these (as well as any other) credit cards. Annual fees, balance transfer fees and over-the-limit fees can quickly rack up and land you right back in the same situation.

Credit Card Consolidation Loans

Consolidation loans work differently than credit card balance transfers. In a consolidation loan, your new lender will assume your credit card debt and you will now be responsible for paying the lender for the fees they incurred to purchase your debt. This is your line of credit. You then receive an interest rate on the line of credit. Interest is assumed from the moment the loan is secured.

Assuming an interest rate from day one may seem like a bad thing but you have to look at a consolidation loan from all angles. While you do pay interest right away, you also have a set repayment schedule. This could help you manage your debt more effectively. You will also have a longer repayment period with a consolidation loan than with a zero or low interest credit card.

The drawback, however, is that consolidation loans are a long-term commitment. It is harder to get approved for a consolidation loan and many consolidation companies will require collateral – like your home – before they can extend a line of credit. While unsecured consolidation loans do exist, they have a higher interest rate, are harder to get approved for and are more difficult to find.

Debt Consolidation Companies

Debt consolidation companies are very different in their approach to helping you manage your credit card debts. These companies are generally non-profit, but not always. They work as sort of a liaison between you and your credit card companies. They contact your credit card lenders and talk to them about your situation. They will try to get them to reduce your interest rates, sometimes eliminating the interest rate altogether.

Once they have negotiated all of your debts, they will then take control of your payments. They will distribute your payments to your various creditors until all of your credit card debt is completely paid off. While this is not a new loan or a new credit card, consolidation companies are another way to reduce and simplify your monthly payments.

Be careful, however, with this method of consolidating your credit card debt. Skews of debt consolidation companies have surfaced over the years and not all of them are honest. Additionally, some companies do not hold to their end of the deal. Many individuals have found themselves in an even worse situation than when they started, due to the illegal or illegitimate practices of debt consolidation companies.

How Debt Consolidation Can Actually Damage Your Credit

If you clear all of your credit card debt and do away with all of your credit cards, closing the accounts as they are paid off, you may be in for a big surprise when you see your next credit score. If you are like most people, you assume that your credit score would increase because all of your debts have been paid. This, unfortunately, is not the case.

Your credit score is based on a number of factors, including the length of time you have had an active account. By closing out your credit cards, you are showing an inability to manage credit. This will negatively impact your credit score. Credit specialists recommend learning how to be responsible with credit and have only a couple of credit cards that you use regularly and pay at least the minimum balance on. If you decide to go this route, you may want to consider keeping the credit cards that you have had the longest. This will help lessen the blow to your credit rating.