Pros and Cons of Credit Card Consolidation Companies
According to the New York Federal Reserve, aggregate American consumer debt currently stands at $14.35 trillion. With the coronavirus pandemic still ravaging the country, millions have been impacted financially.
If you're at your road's end with debt, perhaps you should think again before dipping into your retirement funds. Credit card consolidation companies are among the most viable options you can use to pay off your debts.
However, there are some pros and cons to consider, so let’s take a look.
How Does Credit Card Consolidation Work?
Credit card consolidation is the process of merging multiple debts into one larger one. This might seem counter productive, but it can be an effective means of getting debt under control — if handled properly. Generally speaking, consumers who opt for the assistance of credit card consolidation companies are burdened by a significant amount of high-interest debt.
What Are the Pros of Credit Card Consolidation?
Lower interest rates: A typical credit card charges 16.03% interest rates, while personal loans range at about 11.88%. The rate varies depending on the loan amount, term length, and credit score. However, credit consolidation companies offer lower interest rates than those you are currently paying on your credit card.
Simplifies your finances: Once you consolidate your credit card debt, you only have to make one payment every month instead of dealing with multiple due dates for different payments. The amount is also fixed, so you know how much to set aside every month.
Repay your debt sooner: Credit card consolidation helps fast track your debt payoff, especially if it is significant. Credit cards usually do not have a payoff timeline when it comes to debt. However, consolidated credit card payment has fixed monthly payments with a clear start and end date.
A fixed repayment schedule: When you consolidate your credit card debt, a fixed amount of monthly payment is set. Every month you'll know exactly how much is due and when the last payment will be. There are no unexpected fluctuations in your monthly payments.
What Are the Cons of Credit Card Consolidation?
Upfront costs: Alongside credit card consolidation comes some fees. Some of these fees may include balance transfer fees, loan origination fees, annual fees, and closing fees. Before taking up a credit consolidation loan, inquire about all the fees.
It won't entirely solve your financial issues: Credit card consolidation isn't a magic pill. If you are the type of person who lives beyond their means, you may keep falling back into debt even after paying off your consolidated credit card debt. An alternative would be to create a budget and stick to it. Start building up an emergency fund to pay off unexpected financial obligations so that you aren't wholly dependent on your credit cards.
You may end up paying a higher interest rate: It is possible to end up paying a higher interest rate when using credit card consolidation due to a number of reasons. One of these reasons is your credit score. The more debt you have, the higher the cost of credit. Another reason that may affect the interest rate is loan amount and loan term. Extending the loan period may decrease the monthly payments, but it means you will pay more interest in the long run.
In conclusion, before taking up a credit card consolidation offer, first, review the intricate details associated with the consolidated plan. Consolidating may feel like an instant relief, but you also need to address the root cause of your financial status.