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Credit card consolidation – Is it a good option in 2016?

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By: Phil Bradford
on 6th Jan,2016

Credit card consolidation can be your lifesaver if you’re drowning in credit card debt. See if it can help you in 2016 too.

Like millions, you too perhaps are struggling to pay off the holiday credit card bills. A credit card debt consolidation loan might help reduce the mountainous interest rates, and moreover, the monthly payments. However, a lower monthly payment would lead to a longer repayment term and obviously you’ll pay more in interest over the term of the loan.

So, should you go for a credit card debt consolidation loan? Is credit card debt consolidation really a better choice? Well, whether or not consolidation would be suitable for you completely depends on your individual circumstances and the loan terms and conditions.

Here are some questions that could help you conclude why debt consolidation is a better choice. But before you check out these questions, make sure you check the credit card forecast for this year(2016). This will help you make a better decision.

1. What is credit card debt consolidation?

Credit card debt consolidation is a debt payoff method where all your debts are combined into one single loan or a single monthly payment. So, a debt consolidation loan can serve the purpose.

2. How does credit card debt consolidation loan work?

A consolidation loan is obtained from a bank or a financial institution and with its proceeds you pay off all your existing accounts. Once this is done, your obligations get reduced to a single account. The monthly payment would vary depending on your total outstanding debt balance, interest rate and the terms of the consolidation loan.

3. How do debt management companies function?

Nowadays, there are hundreds of debt management or debt consolidation companies across the nation and those can help you consolidate or manage your credit card debts.

Typically, these companies work in a different way. Instead of going with a consolidation loan, they try to lower your monthly payments by negotiating with your credit card companies to reduce interest rates. Here, you pay an agreed monthly amount to the consolidation company, which in turn distributes it among the creditors. Most of the time, the company keeps a portion of the amount as monthly fees.

While there are some legitimate companies that offer debt consolidation services at a reasonable price, many companies charge huge fees and harm you more than doing any help.

4. Should you go for credit card debt consolidation?

Following are some of the factors that you should consider seeing if credit card debt consolidation is a better choice and truly serves your best interest.

(i) Are you really paying off your cards?

Just consolidating your cards doesn’t mean all your debts are getting eliminated. Even though the lower interest rates are reducing the monthly payments, you still need to pay the amount. So, if you are unable to make the monthly payments due to any reason, consolidating your debts is not going to help you.

So if you can’t even afford a consolidation loan, consider alternatives such as debt negotiation or bankruptcy, the last resort.

(ii) Does debt consolidation really reduce your interest rates?

One of the benefits that debt consolidation offers you is a reduced interest rate. A reduced interest rate automatically lowers your monthly payments and consequently, you pay off your debt sooner. So, if your interest rates are not lowered during the consolidation process, it’s not worth the costs and the fees involved.

(iii) Is debt consolidation a lengthy process?

Typically, in a credit card debt consolidation loan, your monthly payments are reduced. However, it’d be wrong to assume that this is just because your interest rates have been lowered. If your new monthly obligation is substantially lower, this may indicate that you have to bear this for a longer tenure.

A convenient repayment term or affordable monthly payment might seem as a boon for those who are unable to make higher monthly payments. While it's very nice to have a favorable payment plan, you’re just paying more in interest over the life of the loan.

All said, debt consolidation is still a far better choice than most other debt relief alternatives such as debt settlement and bankruptcy. In a debt settlement program, your credit score is blemished because you settle with the creditor for a much less amount than what is owed. A debt settlement on your record further reduces your eligibility to get loans in future. While, on the other hand, in a bankruptcy procedure, all your non-exempt properties are sold and the creditor are paid with the proceeds.

Read more: 18 Credit card consolidation FAQ

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