Keeping debt under control has to do with the source of the problem: your spending habits. If you are living beyond your means, having more money go out than there is coming in, you start to not be able to pay off the statement balance by the due date, begin paying interest, and hardly chip away at the principal balance until you find yourself into debt. Debt consolidation is a great option to get out, as you can lump your outstanding debts with a balance transfer to a new card, or take out a personal or home equity loan to not only pay off, but spread out the payments over time to pay back. Whichever option you choose, there are great benefits to debt consolidation.
One Monthly Payment
If you have multiple cards with a balance it can be tricky to have a successful game plan on how to get out of debt, since each account will have a difference balance, interest rate, and due date, and you might have trouble figuring out where to start. By doing debt consolidation you can now combine the balances into one payment, and the various accounts will get down to a zero balance as you pay them off with the funds.
Lower Interest Rate
The goal of the whole debt consolidation process is to have to a plan to get out of debt, and the best way to do that is to have a lower interest rate so that more of your monthly payment goes to the principal balance instead of towards interest. You know by making minimum payments in the past that it does little to chip away at the balance, so by now spreading out the payments over a set period of time, you can make consistent monthly payments until the balance is gone, and hopefully forgotten, so you never have to relive being in debt again.
Can Pay Off Debt Faster
As I mentioned, making the minimum payment on a credit card balance will probably cover the interest, and maybe a tad off of the principal balance, but if you look at your credit card statement payoff schedule, if you make the minimum payment it could take decades to pay off, so it’s important to make a large payment every month to get out. With debt consolidation, you can pay off faster, by taking the balance and paying it back with monthly payments over, say, five years, and the balance will be gone.
While there are definite pros, it’s always good to weigh the cons as well to ensure that debt consolidation makes sense.
Could Get into a Deeper Hole
When you are doing a balance transfer or loan, you will likely get proceeds of the loan directly deposited to you, or via check, so that you can then pay off each account you wish. While it is great to then see those existing accounts down to a zero balance, if you have not fixed your spending issues you could be tempted to go on a spending spree, since you have now essentially opened up plenty more credit available to you. You could do yourself a favor and cut up the credit cards on the existing account, leave it open, at a zero balance, without the risk that you will charge up a balance again.
Risking Your Home
Depending how far you were in debt or size of the loan you took out even to use for other money needed, if you take out a home equity loan to pay off your outstanding debts, you will have helped yourself out by making it now a management payment to be made for a set period until the balance is gone, but you have now risked your home on the line for this debt, so it’s important that you don’t start messing up your payment history or you could be at risk of having your house taken over by the bank!
End Up Paying More in the End
Now while it may not be as big of an issue because debt consolidation may have gotten you out of a credit card jam by combining all of your outstanding debts into one payment with a lower interest rate, but one issue is that you may actually end up paying more in the end. If you spread out the balance to pay over longer terms, like say ten years, yes, the interest rate may be lower but you could have added years to the payoff, spending more in the end.