Are you finding it increasingly challenging to pay off your monthly credit card bills? Do you own multiple credit cards with outstanding balances on several cards? If you are unable to pay your monthly credit card bills on time, consolidating your credit card debts is an effective solution to get out of your debt trap.
When you consolidate your credit card debts, you are combining multiple credit card outstanding payments with a single monthly payment, preferably at a lower interest rate. However, note that consolidating your existing credit card debts isn't a magic bullet to solve all your debt woes. You need to ensure that you take the right approach.
Here, in this guide, you can find all about credit card debt consolidation, the best ways to combine your outstanding credit payments and smart ways to avoid falling into further debt.
Additional Reading: Debt Consolidation Loans - How Can They Be Useful To You?
What is credit card debt consolidation?
In the world of personal finance, the term consolidation refers to rolling your various debts – be it credit card bills or multiple loan EMIs – into a single monthly payment. When you have multiple outstanding credit card payments, consolidating them simplifies your payments, while also lowering your overall interest rates.
What is NOT credit card debt consolidation?
Remember that debt consolidation is not debt repayment.
Very often, credit cardholders falsely assume that when they consolidate their credit card debts, it magically erases all their debts. The truth is that – when you consolidate your credit card debts, you’re taking another loan to pay off your existing loans.
You have to repay the new loan, just like all other loan products. Let’s say, you take a debt consolidation loan to pay off your credit card outstanding bills. If you continue to keep making purchases on your card as before, you’re likely to get further in debt.
So, it's crucial that you understand the features of credit card debt consolidation, how it works to avoid falling into a bigger debt trap.
Advantages of Credit Card Debt Consolidation
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Potential to lower your interest rates
When you consolidate your credit card debts, you are replacing higher interest loans like credit card bills with loans of lower interest rates. It effectively reduces your monthly bill payments, thereby reducing your monthly financial burden substantially.
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Easier to manage debts
Fewer payments to make each month. Instead of paying multiple credit card bills separately, you now have to make only one loan payment every month.
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Pay your Debts on Time
Since there’s only one monthly loan payment, the chances are that you won’t be late/miss out on your payments.
Disadvantages of Credit Card Consolidation
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Loss of Assets
One of the common ways to consolidate credit card debts is by taking a secured loan. In a secured loan, the borrower pledges an asset as collateral. Here, the asset can be a property, life insurance, or even your retirement funds. If you fail to repay this secured loan, then you stand to lose the asset you have pledged.
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It doesn’t change your unhealthy financial behaviour
The primary reason why you have maxed out on your credit cards is because of your poor financial habits. Consolidating your credit card debts doesn't magically reverse this habit. Instead, it only furthers the illusion that you have paid off all your credit card debts when the reality isn't that.
So, you need to be extra cautious while consolidating your credit card debts. Now that we have seen the pros and cons, let's take a look at ways to do it.
Popular Ways to Consolidate your Credit Card Debt
There are several ways to consolidate your credit card debts to manage it better. Some of the popular options include:
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Take an unsecured loan
With the rise of digital lending, today, it's easier than ever before to obtain an unsecured loan at affordable interest rates. Some of the popular options include personal loans or even specialized debt consolidation loans.
Pros:
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Easy eligibility. All you have to do is provide essential KYC documents, salary/income proof, and you are provided the loan amount within a few working days.
Cons:
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Not the best interest rates. One of the biggest drawbacks of unsecured loans is that the interest rate is higher when compared to secured loans.
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Take a Secured Loan
The second option is to apply for a secured loan like a home equity loan or a line of credit. In secured loans, you have to pledge a property or asset as collateral to avail the loan. You can use the loan amount to repay your credit card bills and get your credit card payments sorted.
Pros:
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Low-Interest Rates – Secured loans offer some of the lowest interest rates in the market. Thereby helping you reduce your debt burdens without drowning further in debt.
Cons:
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It’s Risky – The biggest drawback of secured loans is that you pledge an asset like your home or your retirement fund as collateral. If you're unable to pay this loan, you stand to lose out the assets you have worked hard to build.
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Credit Card Balance Transfers
Sometimes credit card companies offer attractive interest rates to win new customers. If you come across any such offer, you can transfer your credit card balance to the new provider. Since the new provider offers a lowered interest rate, it can help you reduce the outstanding balances.
Pros:
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Hassle-free – quick and convenient.
Cons:
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This option may not be available at all times or apply to all.
End Note
Beware of the Risks of Debt Consolidation
If you are struggling with repaying your credit card bills on time or racking up interest by just paying the minimum outstanding, then you can certainly benefit from debt consolidation.
However, you need to work on enhancing your debt management skills to avoid repeating this mistake in the future. You can consider getting the guidance of a personal financial advisor to improve your money management abilities and avoid getting into debt traps and start building your savings.