When individuals have several credit cards or a variety of loans they are paying down, keeping them organized can be stressful. Different lines of credit with varying interest rates leaves more room for mistakes, such as missed or late payments, which can cause rates to spike, fees to be tacked onto the balance and damaged credit. For this reason, many borrowers consider entering into a debt consolidation program to help manage their balances more effectively.
These types of debt management plans allow individuals with several loans or credit accounts to consolidate their balances into one single payment each month with a single interest rate. Not only does this make it easier to pay off balances and avoid mistakes, but it can also be more cost-effective in some cases. For example, if a consumer has five credit cards with annual percentage rates ranging from 9.99 to 24.99 percent, they may be paying a great deal in interest charges each month that is making it more difficult to get out of debt. Once they consolidate, they may be locked into a lower rate that helps them avoid paying so much additional interest.
While debt consolidation can be an effective strategy for getting out of debt, individuals should be aware of the pros and cons. For example, borrowers may only have one low monthly payment, but one reason for this is that the repayment period may be stretched out over a long period of time. This means that over the life of the loan, individuals will be paying more in interest charges. In addition, low payments may free up additional income to meet other financial obligations.
It’s important that consumers don’t fall back into negative spending habits, such as using credit once again or using their funds for discretionary purchases while they are still repaying debt. Instead, it can be helpful for Americans to put the money they are saving to good use, such as toward a high-interest savings account, retirement fund, emergency cash reserve or to make larger debt payments.
Lastly, if individuals have secured a home equity loan or line of credit to consolidate their debt, it’s crucial that they understand the risk they are taking on. Failing to make payments or falling behind can jeopardize their home and lead to significant credit score damage that can take years to recover from. While credit card issuers cannot repossess a borrower’s home for falling behind, those borrowers who use their homes as collateral can still lose them in foreclosure.