Easy access to credit can be a lifesaver when cash flow is tight or an unexpected bill rears its ugly head. Unfortunately, many people struggle to keep up with a cost-effective repayment plan after an expense or major purchase is put on a credit card. The combination of hefty interest rates and high spending limits create fertile ground for a credit mess – one that ultimately results in a lowered credit score and an inability to get financing in the future. However, there is a solution to the potential downward spiral of credit card use in debt consolidation.
What is Debt Consolidation?
First, it’s important to understand what debt consolidation isn’t. Often confused with debt settlement – a tactic used by credit “repair” firms and collection agencies – debt consolidation does not involve walking away from or negotiating down your debt balance. Instead, it is simply the process of combining multiple credit card or personal loan balances into a single, more manageable debt. Debt consolidation can be done in a few ways: either as a credit card balance transfer or a personal loan.
When you consolidate debt with a credit card balance transfer, you are effectively paying off old credit card or loan balances with one big swipe of a new credit card. The benefit? New credit card balance transfers are often available at low or no interest, helping you lower the total cost of your debt. However, balance transfers have a few caveats: typically there is a balance transfer fee charged when the request is initiated (between 1% and 5%), you have a limited time to take advantage of the low-interest-rate promotion (often 12 – 18 months), and you may be tempted to repeat spending habits thanks to a brand new credit card limit.
Debt consolidation may also be done through a personal loan. By taking out a new traditional personal loan and paying off your credit card balance, you can reduce the total interest rate for an extended period of time while enjoying fixed payments for the duration of the loan. The most significant benefit of debt consolidation with a personal loan is the ability to wipe the slate clean on your credit card balances, without the temptation to add to your debt load with a new credit limit. Of course, this only works when you don’t add to your newly zeroed out cards. However, a personal loan requires fixed monthly payments for an extended period of time which may or may not fit well into your monthly budget for the long haul.
Which is Best for You?
Both balance transfers and personal loans allow you to consolidate higher-interest rate debt and simplify your overall financial picture, but they aren’t always an easy solution. Qualifying for either may not be a viable option, especially if your credit has taken a hit due to your past financial habits. More importantly, you have to be dedicated to putting the lid on your credit spending if you truly want debt consolidation to work well for you. If you aren’t there yet, on either front, you may want to spend some time determining how to curb your costly credit habit before seeking out consolidation options from a bank or private lender.
This article was written by financial expert Rebecca Kennedy on behalf of The Net Lender – a reliable car title loans company based in Los Angeles.