If your debt is spread out between creditors, you might consider consolidating into one simple monthly payment.
Most Americans have 3-4 credit cards (if they have any) and it can be frustrating to keep track of a handful of monthly payments.
That’s why consolidation is an attractive option—you can tidy up your finances in one move. But there are pitfalls if you don’t know what you’re doing.
If and only if you have a solid plan to pay down the debt fast and not just do the minimum payments, you can consolidate or do a balance transfer to get a lower interest rate.
Here’s what you need to consider:
1) You can save a lot of money in interest.
The first thing you should ask when consolidating is whether your interest rate is higher or lower on the new loan. If it’s higher, DO NOT consolidate. All you’re doing is spending more money.
But often you can get a lower rate on a consolidation loan than on your original credit cards—and that can save you a lot of money as you pay it off.
2) If your credit card interest rates are variable, locking in a rate may help. But that’s something of a risk depending on the market.
1) Consolidating won’t correct the behavior that got you into debt to begin with.
Having several smaller bills can actually help you. You will have a clearer picture of what your debt means—how you got it and whether the bills are worth it.
And you can use the snowball method—paying the smallest debt off first—to lower your monthly bills the fastest and give you some early wins. In the end, you’ve paid off your debt AND adjusted your behavior.
2) Fees and variable rates make it hard to know whether you’ll save money
Origination fees mean your interest rate really does NEED to be lower before you break even. And if either your credit cards or your consolidation loan are variable rate loans, then you need to be careful you don’t wind up paying more interest than you need to.