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Benefits and Caveats of Credit Card Debt Consolidation

Mar 9, 2008
A debt consolidation loan is a very simple concept: it is one big loan taken out to pay off several smaller loans. As a result, you have a single loan payment, versus multiple payments. There is a definite trend in the lending industry toward consolidation loans. American consumers have gotten carried away with their credit cards. As a result, millions of people have more credit card debt than they can handle. A consumer loan consolidation is a good way to deal with the burden of excess credit card debt.

By consolidating your credit card debt, you can lower your interest payment if the interest rate on the new loan is lower than the interest rates on your credit cards. It does not by definition decrease the total amount that you owe. However, credit card debt consolidation companies can negotiate with your lenders to lower your fees or balances, which can have a symbiotic effect when combined with a lower interest rate.

A consolidation loan may decrease your monthly payment by stretching the term of the loan out over more years. The obvious advantage is that it frees up more cash for other things. However, on a long-term loan, even if the interest rate is lower than the original loans, you could still end up paying more total interest because of how much longer you have to pay on the debt. It depends on what is most important to you - decreasing your monthly payment or paying off your debt. If paying off your debt is your main concern, you should seek a shorter term loan.

After consolidating your debt, you may suddenly find that you have lots of credit on your credit card. Avoid the temptation to start using your credit cards again! Otherwise, what's the point? Do not forget - you still have all of the original debt - it's just rolled into a single payment. If you start using your credit cards again, you'll end up with more debt than when you started.

Another potential danger of loan consolidation arises if you use your home as collateral. Credit card companies can't take your home. But if you use your home as collateral for a consolidation loan and fall behind on your payments, then you can lose everything. However, there is also an advantage to this strategy. Taxpayers can deduct some, if not all, of the interest paid on a loan that is secured by their home. You do not have this advantage with unsecured loans. This is one more way that a consolidation loan can help free up cash flow. Just make sure you make your payment!

One possible disadvantage to using a loan consolidation company is that there may be a notation placed on your credit report that says "TPA", which stands for "Third Party Administered". This could be considered a negative factor by future creditors...but not nearly as negative as missing payments. It's not even close. It is much better to have a consolidated loan than to have late credit card payments on your credit report.

In conclusion, like most things in life, there are advantages and disadvantages to getting a consolidation loan. In general, though, if you have more credit card debt than you can handle, the benefits outweigh the negatives. A consolidation loan can help you get control of your debt situation and prevent you from ruining your credit.
About the Author
ClearOne Debt Relief is a full-service debt management company providing debt settlement services such as credit card debt relief to hundreds of thousands of customers. We help people cut their debt in half, lower their monthly payment, and get out of debt in as little as 24 months.
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