Should You Even Try To Consolidate Your Credit Card Debt?
So, do you think a consolidation loan is something you're interested in? Would it help your financial situation or just increase your already excessive debt? Actually, sometimes the first step toward addressing the problem of excessive credit card debt is to consolidate.
Are There Different Kinds of Consolidation Loans?
Credit card debt consolidation loans, in general, are unsecured loans, that is, they don't require you to pledge any security or collateral. These loans are made by banks and other financial institutions at an interest rate much lower than the credit card companies. Your initial benefit to this type of loan is an immediate reduction in your monthly required payment.
However, if your credit rating has already been impaired due to slow pays, the bank may require a secured loan. This will not only affect the interest rate of the loan, it will require some form of collateral, i.e., the loan would have to be secured by something of value that you own. The value of the collateral is determined by the amount of the loan.
Another very popular method of consolidation is to use a new credit card, one that is being offered with a special introductory APR. This would give you temporary relief of the high interest rate and give you the opportunity to pay your balance down on the new card. However, you must remember that the APR quoted on the credit card application is only an introductory special and it is only good for a specific time period.
As soon as the introductory rate expires, the long term (or the standard) APR will automatically become active. This is why it is so important for you to read all the terms and conditions of the new credit offer. You need to know how long the introductory rate will last so you can determine if this card is actually going to benefit you; as you need to pay down your debt as much as possible during this time period.
So, when you go looking for a credit card to consolidate your credit card debt, you must be keenly looking for these 3 things (in terms of APR) – 1) introductory APR, 2) introductory APR period, and 3) the standard APR. Let’s see how each one is important.
What You Need To Know About An Introductory APR:
Introductory APR is one of the most important things to consider when you desire to consolidate credit card debt. Some credit card companies offer an introductory rate of .0%. However, you need to determine the exact length of their introductory offer; some introductory offers only run for 90 days. This not only gives you an immediate relief of your continually growing credit card debt, it also gives you 90 days to reduce your total debt. Obviously, the longer the introductory rate period, the more benefit you'll derive from the consolidation.
What's So Important About The Standard Rate?
The standard rate is the interest rate that will be applied to your balance after the expiration of the introductory low APR. If the standard rate of interest is significantly less that your previously used credit card, the debt consolidation will benefit you, as your required monthly payment will have been reduced.
If the standard interest rate is the same as your previously used credit cards, this particular credit offer will not benefit you, especially if you have consolidated several cards onto the one, the increase in your credit card debt in total dollar volume will wipe out any savings you would have accumulated during the introduction APR period.
However, the above totally depends on how many cards you have consolidated and what your total debt is. If you have several (3-4) high-interest cards with low balances, it should not be a problem and you should immediately see a reduction in credit card payments and debt. It will allow you to make one smaller payment instead of having to satisfy several minimum monthly payment requirements.
If you think that you will be able to clear off the entire credit card debt or at least make a huge dent in your total debt while the introductory interest rate is in effect, this could very well be how you would choose to consolidate your credit card debt. The card that has a standard rate of interest that you can live with and won't place a financial hardship on your budget, that is the
card you should use to consolidate your credit card debt.
Although balance transfers and credit card debt consolidation loans have the same objective behind them, the consolidation loans are sometimes considered better because you normally end up closing most of your credit card accounts; which have been been responsible for creating your excessive debt in the first place. However, balance transfers have their own advantages which are not available with a credit card debt consolidation loan. If you can use the balance transfer method to get your debt under control and can make your payments on the new card timely, and can use the new card responsibly, you can actually improve your credit rating. Choosing between a credit card debt consolidation loan and a balance transfer is really a matter of personal choice.
