Consolidating debt isn’t always the best decision. These are common reasons you might not want to consolidate debt from credit cards.
The light at the end can seem brighter when you’re under the burden of numerous credit card debt payments each month. You might be able to get a loan or a new credit card with a lower interest and only make one monthly payment.
Consolidating credit card debt is great in certain situations. But it is not always a quick fix. These five situations are reasons to reconsider consolidating your credit card debt.
1. You haven’t fixed the cause of your credit card debt
Consolidation shouldn’t be seen as a way out of credit card debt. It is simply a way of reducing monthly payments, and saving interest.
Before you contemplate consolidating your debt, you should have addressed the root cause. To reduce your spending, you should establish and adhere to a budget. If your income isn’t sufficient to pay your bills, you can either cut expenses or increase it.
These things are essential to avoid falling into the same traps and getting in debt again.
2. The best options for debt consolidation are not available if your credit score doesn’t meet the required standards
Consolidating your debt will only make sense if it saves you hundreds of bucks or more. A personal loan with a low rate of interest is required to consolidate debt.
What do they have in commun? You will only be eligible if your credit score is high enough to qualify. Credit scores of at least 670 are a good idea, but 700 or more would be better.
3. You’d use a secured line of credit, loan, or loan.
One way to consolidate credit, especially for those without the best credit, would be to get a secured line of credit or loan. A home equity line credit (HELOC ) is a popular option.
While opinions vary on this issue, I would recommend it only as an extremely last resort. Credit card debts are unsecured. It’s illegal to default with a credit card. However, the card issuer is not allowed to take over your assets.
Consolidating your credit card debt with HELOCs or secured financing can make it more secure. You also put an asset at-risk.
4. It won’t save you much.
Consolidating debt can be costly. Most balance card charges you 3% for each balance that you transfer. The 0% intro APR will end and you’ll begin paying interest on those remaining balances. There may be an origination fee as well as a prepayment charge for loans. These fees are meant to ensure you pay the lender at minimum a certain amount of principal and interest.
Consolidating debt is worthwhile if you have debt that will take over a whole year to repay and which will cost you lots of interest. But, if the debt isn’t something you can realistically repay in just a few months it may not be worth the time and expense. Calculate what you would spend with and without debt consolidation to help you make an informed decision.