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Merging your credit card payments through debt consolidation – Is this the right choice?

by James on May 23, 2013

So, you’re worried that your debt level is too high and you’ve decided to take some rock solid steps about it. That’s good but did you consider consolidating your credit card payments through the wide array of debt consolidation options? If answered yes, your next move will depend on the financial situation that you’re going through. The idea behind combining your payments through debt consolidation is indeed simple: merging your high interest debts into a single low interest rate payment.

Credit card consolidation can benefit you in two ways, firstly with a lower rate, the monthly payments will be lower and you can have enough cash for your other important needs and secondly with lower rates, you could apply the interest savings towards the outstanding principal balance of the loan. Both the aforementioned benefits could help you pay off debt faster. For more details,  please visit here.

Exploring your debt consolidation options

Debt consolidation can be done through a plethora of options and if you’re keen to know them check them out.

  • Leveraging low rate balance transfer cards: Why pay 24% on 3 separate cards when there are options to pay 15% interest rate on one card? A 3-5 % balance transfer fee won’t create a massive difference on the amount that you save. You just have to carefully go through the fine print of the card so that you’re not subject to outrageously high interest rate hikes immediately after the completion of the introductory period.
  • Tap the equity in your home: If you’ve built enough equity in your home, you can tap the home equity in the form of a home equity loan. The interest rate that you pay on the home equity loan is usually tax-deductible and the interest rates are far lower than what you pay on an unsecured loan. However, the monthly payments need to be made on time to avoid an impending foreclosure.
  • Apply for a ULOC: A ULOC is very similar to a credit card as the bank allows you to access a new line of credit at an affordable and convenient rate with an agreement from you that you will pay back the entire loan on time with the interest rates. You won’t however receive an actual card as the bank will offer you checks from the new line of credit.

Are you ready to take the decision of consolidating your credit card payments?

While you keep investigating your options, you need to look at the final numbers. Will the new loan cost you more in the long run? Here are some questions that you should ask yourself before taking the final plunge.

  • Will the rate on the ULOC or the balance transfer card likely to change in the near future? If so, how much extra will you end up paying? There are some loans that carry variable rates and so you need to take such things into account.
  • How long will the term of the loan be extended to? Can you incur any additional charges, fees or penalties if you make more than just the scheduled payments?
  • Are you indeed sure that the debt consolidation loan will fit into your budget?

Your decision to consolidate your credit card payments through debt consolidation will depend on the answers that you have for the above mentioned questions. With all your debts consolidated into one and a smaller monthly repayment fee, do not under any circumstances think you now have the freedom to spend more. Consolidating debt reduces your monthly repayment (through a lower interest rate), however it can extend the life of the loan so if only minimum repayments are made, it will result in costing you more over the long run. Instead you should take the opportunity to repay the debt as quickly as possible through the money saved from the lower monthly repayment.  Don’t default after consolidating your debts as this will have a terrible impact on your credit score.  Try your best to manage your personal finances and put in your best efforts to repay the new loan on time to safeguard your credit score.




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