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.
Michael Gold, a certified financial planner, works in investments at Wachovia Securities. "If you are a homeowner, there are many advantages in taking out a second mortgage or a home equity line to consolidate your credit card debt," he says. According to Gold, benefits include lower interest rates and the ability to write off interest on a $1 million mortgage and interest on a $100,000 home equity loan. Consolidation also reduces the number of payments and creditors to one, which can make money management easier.
Gold insists that before making any major decisions, you should compare not only the interest rates but the closing costs on the loan. Check with your accountant on the tax and cost efficiency of your plan as well. "If the costs and interest payments are low enough, this can be a great alternative to consolidate your credit card debt," Gold says.
If you are not a homeowner, 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.
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.
It puts your home and other assets at risk. Most consolidation loans are secured. If you fail to pay, you will lose whatever is securing the loan, which in most cases is your home.
"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.
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