The Pros

• Lower Monthly Payment – This is the line that hooks most people to the idea of credit card consolidation. If you’re paying $1000 per month, and a company offers you $500, it’s hard to not think that’s a great deal.

• Lower Interest Rate – Especially if you’re going with a secured loan, debt consolidation can give you a much better interest rate on your debt. With a secured loan, you will use your house, car, or bank account as collateral.

• One Monthly Payment – Instead of paying various creditors, you will only need to worry about paying one. It’s easy to keep track of payments and hard to forget about.

The Cons

• The Risk of More Debt – When you choose to consolidate your credit card debt, your burden of debt may feel lighter. Because you feel less burdened by debt, you may be more likely to using your credit cards again, and dig yourself deeper into debt.

• Lose Your Home or Car – If you used your home or car as a security, and find yourself unable to pay back your loan, you can lose your personal property. Be careful, many debt consolidation loans are in fact home equity loans.

• One Monthly Payment – If you have a credit card debt with a higher interest rate, it may be best to pay that off sooner than those with lower interest rates. However, when you consolidate your debt, you cannot accelerate the payoff of one credit card over the other.

• More Money In the Long Run – Although many debt consolidators promise to lower your payments by significant amounts, you term of payment may lengthen. When all is said and done, you could end up paying more.

• You Can Do It On Your Own – Debt consolidation companies are middlemen between you and your debt. Instead of paying them on average 10% of your monthly payment, not to mention the enrollment fees, you can direct that cash toward the debt.

What Does It All Mean?

Debt consolidation may seem like the easiest solution to your problems, but at the end, it’s actually just another gimmick that profits off of you. Consolidation does not remedy the problem, it actually makes your debt worse. If you use a debt consolidator, you are paying them to hold your money for a period of time until your credit card companies give up hope of ever seeing their money from you. Then, the consolidator negotiates a deal with your credit card company, who inevitably accepts. In the meantime, your credit rating lowers. Worse yet, creditors may show derogatory information about you on your official credit score, further damaging your good standing.

For those who choose to use home equity loans, understand the risks before making the leap. Any unforeseen event (an unexpected pregnancy, an illness, a layoff) can throw off balance your carefully orchaestrated finances, leaving your house at risk. If you must take out a secured loan, consider using your car as collateral. Although no one wants to end up in the worst case scenario, it’s cheaper to replace a car than a house.

Photo by Andreas Rueda

* “Debt relief is just a phone call away!”

* “Stop paying your debts today!”

* “Erase your high interest rate! Call now”

Every year, millions are lured in with high hopes. And it’s easy to understand why.

With so many individuals now carrying high credit card balances, never before has the prospect of credit card consolidation appeared more appealing. Yet, despite the glorified status lenders have bestowed up them, credit card consolidations can quickly turn a financial problem into an irrevocable financial crisis.

The promised “quick fix” of debt consolidation is powerfully tempting. But the slippery slope of consolidation loans can introduce a variety of other threats to one’s fiscal health.

Among the gravest dangers:

Small Fees Become Big Expenses

Consolidating debt isn’t free. And the costs (hidden or straightforward) can be significant. Securing a new loan or consolidating old ones may not only incur administrative and processing fees, you may also be penalized for paying off your balance early (assuming, of course, that you could). Even worse, consolidation loans are frequently secured against one’s home, which subsequently leads to legal fees and a host of other ancillary expenses. There is no shortage of “small fees.” When totaled, it’s a heavy price tag for credit card consolidation.

The Balance Transfer Catch

Balance-transfer opportunities are a dime a dozen. And although they work for the short term, zero or low rates only last for a limited period of time. If you think you can repay the full balance during that time but ultimately can’t, you may soon end up paying a higher rate on your outstanding debt than you were before the consolidation.

Stranger Danger with Debt

As children, we were frequently told never to talk to strangers. Some credit lenders should have been included in those maternal warnings. Because numerous debt consolidation providers make substantial commission on balance transfers and loan consolidations, there is no shortage of misleading advocates for consolidation trying to squeeze even more money from your pockets.

The Risk Factor

Taking out consolidation loans or having to switch balances back and forth leaves a blemish on your financial history. After a substantial amount of this sort of activity is recorded, it will portray your financial responsibility in a negative light and leave you a “high-risk” candidate for financial products and services in the future.

Does Credit Card Consolidation Make Sense For You?

It depends.

If anything is easier to get into than debt, it’s more debt. And, without exception, this is ironically the gravest danger posed by credit card debt consolidation.

Unlike a debt consolidation loan, which is typically secured debt, credit card debt itself is unsecured debt. Once your present balances are consolidated through a loan or multiple balance transfers, your remaining credit cards return to having a zero balance with ready access.

If that zero figure remains unchanged throughout your entire repayment process on consolidated debt, it might be in your best interest to seek a credit card consolidation opportunity. If, however, you have any inclination that you will soon max-out your credit cards again and abuse your consolidation process as a renewed license to spend, avoid this financial alternative at all costs.

Photo by danesparza