Credit card debt consolidation

By Emily Starbuck Gerson and Ben Woolsey

If you have significant credit card debt, budgeting and slowly chipping away at the balance may not be enough to set you free. You may want to consider credit card debt consolidation, which merges the outstanding balances on your credit cards into one loan or onto one credit card with a lower interest rate.

While in the past, financial advisors may have recommended using a second mortgage or home equity line to consolidate credit card debt, today's real estate reality makes this a dangerous game. Instead, you can simply transfer your balance to a low interest credit card. For example, if you have a $10,000 outstanding balance at 20 percent APR, over the course of a year you would pay $2,000 in interest charges alone. If you consolidated your credit card debt onto a credit card with a 10 percent APR, you would save $1,000 in interest. See our balance transfer calculator to test your own scenarios.  

Amanda Walker is a manager at GreenPath Debt Solutions, a nonprofit credit counseling service. "Consolidating many debts into one loan can seem like an answer to someone's prayers if they are in trouble with multiple creditors," she says. Conversely, consumers should be sure to be aware of the disadvantages, which Walker lists as:

• It makes it easier to get further into debt. With a lower payment and no more pressure from creditors, many consumers continue using credit cards and fail to change the spending habits that got them into trouble in the first place.
• It costs more in the long run. Most consumers end up paying for the debt over 10 to 30 years, spending much more than they would have had they kept each individual loan.
  

"We think the best idea is for consumers to better manage their finances and cease all use of credit cards immediately, until out of the dark financially," Walker says. "If they need help, it's out there." Consider enlisting the help of an accredited credit counseling service if you feel like you can't do it alone.

See related: Balance transfer calculator    

Published: December 30, 2008

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