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Credit Card Debt Consolidation Loan: Pros and Cons

Are you feeling overwhelmed with paying for the balances of your credit cards? You should consider consolidating your card debt. Debt consolidation is a debt management strategy to combine your balance for multiple credit cards into a single monthly payment.

You can apply for a personal loan from a bank, online lender, or a credit union for consolidating card balances. In an ideal scenario, the new loan would come with lower interest charges, so you can easily manage the process of debt repayment.

To find out whether this is a good debt consolidation strategy for you, let's look at the pros and cons of debt consolidation.

Pros of Debt Consolidation

Repay your debt sooner

When you consolidate your debts, like doing a balance transfer on your credit cards, it can help you go into a faster track in paying all of your loans. Since credit cards do not have a specific timeline that requires you to completely pay off the balance, users usually abuse their credit line.

When you have a debt consolidation loan, you are required to make a monthly payment until you pay off the entire debt. The quicker these loans are paid off, the better your financial status will be.

Simplify finances by making one monthly payment

One of the hardest parts of balancing bills from different credit cards is the multiple due dates every month. Keeping tabs on all the deadlines can be quite overwhelming, and there might be days when you miss out on payments.

With consolidation loans, you can combine the payments for all of your credit cards into a single one. There's no need to worry about missing the payment date and paying off penalty charges. The only thing you have to remember is one date every month!

Get a lower interest rate

Compared to the average credit card, debt consolidation loans generally come with lower interest rates. Having lower interest rates can give you more leeway in making payments for your debt.

However, you have to remember that a loan interest rate will depend on your credit score, the loan term, and the overall loan amount. If you have better credit, chances are you'll get a better interest rate.

Have a fixed schedule for debt payments

Sticking to a specific repayment schedule can help you keep track of your finances while juggling all your other responsibilities. Not only will you have to remember a single date, but you also have a single amount to worry about, and you have a specific deadline to know when the loan terms will end.

Better credit utilization improves credit scores

Though taking out a loan might initially hurt your credit score, it will definitely give better credit scores in the long run. As long as you make all your deposits on time, your payment history will improve. Again, keep in mind that your payment history accounts for about 35% of your total credit score.

Additionally, paying off the balance of your cards will mean a better credit utilization rate. This is also a factor that can influence your credit score.

Cons of Debt Consolidation

Debt consolidation does not guarantee that you can get out of all your debts

Though consolidating your debt is a good solution against consumer credit problems, this is not a guarantee that you will never find yourself in the same situation again. While improving your credit, you should also work into forming better financial habits and sticking to them.

If living a more financially responsible life is challenging for you, you can consult financial advisors and credit counselors and ask them for help.

Debt consolidation loans might come with extra fees

There might be some fees when you apply for personal loans to consolidate your debts, including balance transfer fees, application fees, annual fees, and termination costs. So, before you start any application, make sure you do your research and do the fine print.

Not all debt consolidation companies offer lowered interest charges

If you have poor credit scores, there are chances that you might not get a good interest rate. It can definitely be higher than what you are paying at the moment. Aside from your own score, high interest charges can also be because of the loan term, the loan amount, and the specifications of the lender you partner with.

As you are considering different ways to get out of debt, think about the possible opportunities awaiting you when you look into your financial history and your own credit score.

Frequently Asked Questions

Is consolidating credit cards bad for your credit?

Consolidating debt can be a great way to get your credit back on track and make budgeting easier, but there are risks. It lowers payments in the short term, but it may also cause a temporary dip in your credit score. So long as payments are made regularly, your score should return to normal and perhaps even improve.

Should I get a personal loan to pay off credit card balances?

Taking out a personal loan for credit card debt can help it pay off in full. This is because personal loans often have lowered interest rates than credit cards, meaning you could save money in the long run while paying off high-interest debts quickly.

How long does debt consolidation stay on your credit report?

When debt is reported as settled, it will stay on a credit report for seven years from the date of settlement if there are no late payments.

What are the drawbacks of a debt consolidation loan?

There are significant risks to consolidating unsecured loans into a single secured loan. When you pledge assets as collateral, it puts the pledged property at risk if it can't be paid back on time. You could lose your home or car in addition to other valuable possessions such as life insurance, retirement funds, and more!

Is debt relief a good option?

To be successful at debt settlement, you need to have the ability and willingness to make a substantial lump sum payment because it can't work if you're struggling financially. The best deals are for 25% of what's owed—even with a good deal, however, there will still be plenty left on your bill that could ultimately result in bankruptcy or an expensive loan from friends/family.

Before you jump into debt consolidation, think about your financial history, your current standing, and what you want for your financial future. Weigh your current consumer debt in order to gauge how different strategies can be helpful for your financial goals. Learn more about debt consolidation from AnyCredit today!

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Here at AnyCredit, we aim to make the most complex financial issues and topics easy to understand. In our articles, we will be making analysis, smart finance judgments, and honest conversations to help you make sense of your financial capacities and options.
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