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Credit Card Debt Consolidation Pros and Cons

Credit Card Debt Consolidation Pros and Cons

Credit card debt consolidation allows you to avoid paying interest on multiple debts but at the same time, you may end up paying higher interest amount over a period of time.
Charlie S
Last Updated: Mar 8, 2019
Credit card usage has increased to a great extent, due to the increasing income of people. It allows us to make purchases immediately with a promise of paying the dues later with some interest. However, if someone goes on making huge purchases without keeping in mind his repayment capabilities, then he will have to deal with the burden of credit card debt.
If you end up defaulting on regular payments, it can seriously affect your credit score, which will in turn make it difficult for you to seek loans in the future. Consolidation is a way to improve your overall debt condition and come out of it successfully. However, before you opt for this method, studying its pros and cons is essential.
Is it Effective?
In the debt consolidation process, multiple loans taken by you are replaced with a single loan with a low rate of interest. This move can help you lower your interest payments on a monthly basis and thereby, help you in fast payment of debts.
As your interest outflow is reduced considerably, start saving money every month, and invest it in a profitable scheme such as mutual funds, to get better returns over a period of time. There are debt consolidation agencies, which will hold talks with credit card companies and bring down your total outstanding debts apart from reducing the rate of interest.
Pros
► The biggest advantage of this program is that, you can get the freedom of deciding your payment date. The process of rebuilding of your credit scores starts as you make just one payment to the finance company. You can also consult your financial planner for the same.
► Another advantage is that, you can avoid the situation where you have to file for bankruptcy. Bankruptcy can be the worst nightmare for any individual, and it remains on your credit report for a number of years. As per the conditions of bankruptcy, you might have to surrender your assets so that your financier can recover his money which you defaulted on.
This indeed is a big financial loss and the main reason for opting for debt consolidation.

► Opting for this method can also stop the frequent phone calls from collection agencies for recovery of your equated monthly installments (EMI's).
Cons
► It has been a common observation that, the person who has borrowed money will end up paying a much higher amount over the years. This is mainly because the period (number of years) and the rate of interest are stretched for a long period of time.
► Another major disadvantage is that, you will be in debt for a long period of time, which itself is detrimental to your personal financial interests.

► To add to this, not all such programs are fully reliable, and they might not provide you with all the facilities and benefits, which were promised to you.
► Also, after signing this plan, if you do not make payments on time, you might have to pay very high penalties.

Though, the disadvantages may not be that harsh, avoid excess credit card usage in the first place. Financial discipline, financial planning, good savings ratio, and correct money management are the keys to a financially secure and happy future.