Pros and Cons of a Credit Card Consolidation Loan

If you’re one of the millions of Americans with overwhelming credit card debt, you may have looked into a credit card consolidation loan to tackle your debt. And while a consolidation loan for credit cards can be a good option when you have a lot of bills to pay off, there are plenty of alternatives to consider. Each has its own pros and cons.

In addition to consolidation loans for credit cards, some of the most popular methods to pay off bills include:

• Paying down debt on your own
• A balance transfer
• An interest rate negotiation

In addition to those, you may want to consider either a Debt Management Plan (DMP) or Debt Settlement Plan (DSP), both of which can help you get out of debt now and develop strong money management skills for the future.

Review your current financial picture and goals with a financial advisor or specialist certified credit counselor to determine the best plan for your needs. Before you do, let's take a look at the pros and cons of each option.

Credit Card Consolidation Loans

With a credit card consolidation loan, you work with a lender to combine all of your unsecured debt into one monthly payment. The lender will pay off your credit card bills, and in exchange you’ll enter into a loan agreement with the lender to pay back the money. For a credit card consolidation loan to be worth your while, you’ll want a plan that offers a lower interest rate and/or lower monthly payments than you’re currently paying to your creditors.  

Pros:

• Pay off existing debt now
• Possibly enjoy a lower interest rate and/or lower monthly payments than you’re currently paying to your creditors
• Pay just one bill every month (instead of several)

Cons:

• Fees. Some credit card consolidation companies charge up-front fees for their services. Steer clear of those companies and only seek help from one that doesn’t assess fees.
• More debt. For some consumers, a credit card consolidation loan lands them deeper in debt. Be sure to ask questions of the lender to understand the plan and how it will work for you. A good consolidation plan will help you get out of debt the right way and offer resources to help you stay debt-free. Educate yourself about credit card consolidation loans to determine whether they’re the best option for you and your particular financial needs.

Paying Down Debt on Your Own

As analternative to a credit card consolidation loan, you can work with your creditors and your budget to develop a plan to wipe out debt on your own. You might pay down your debts through a balance transfer or interest rate negotiation. Both put the control in your hands, which can be good or bad, depending on how disciplined you are. Remember, you’ll need to not only put together a budget, but stick to it as well.

With a balance transfer, you’ll move credit card debt from all cards onto one existing or new credit card – ideally one with an introductory, interest-free or low interest rate offer. You can search for the best offers online or review offers you may have received in the mail.

On the other hand, an interest rate negotiation is an agreement with your creditors to lower the interest rate on your credit cards. You’ll contact each of your creditors to request better rates on your open accounts. It’s helpful to mention competing offers or plans that you’ll consider if your creditors don’t seem willing to work with you.

Pros:

• You make the decisions – when to pay, which debts to pay first, how much to pay monthly, etc.
• Done correctly, you’ll develop strong money management skills so you don’t land in debt again.
• You may enjoy a lower interest rate with either a balance transfer or interest rate negotiation – which may mean you’ll pay less over the life of your debt.
• With a balance transfer, you’ll have just one payment each month instead of several – similar to a credit card consolidation loan.

Cons:

• Many consumers find it tough to control their finances on their own. If you’ve already landed in debt, digging yourself out can be extremely challenging. You’ll need a lot of discipline, and without an outside resource, you’ll need to be your own cheerleader!
• If you’re not careful, you may continue charging more debt to your credit cards and find that you just can’t pay off your balances on your own.
• If you transfer balances to a card with an introductory or “teaser” interest rate but don’t pay off your debts within a set time period, the interest rate on your credit card may increase, meaning you’ll pay even more per month than prior to the balance transfer.
• It’s possible your creditors won’t offer you a lower interest rate; their decision depends on your past payment history and your likelihood to make on-time payments in the future.
• Without seeking financial education to improve your money management skills, you may see an interest rate negotiation or balance transfer as an opportunity to spend more money on your credit cards. It can take a lot of effort on your part not to fall into this trap.

Alternatives to Credit Card Consolidation Loans and Other Plans

As with any financial goal, whether you choose a credit card consolidation loan or other payoff method depends largely on your current financial situation, including your existing debts, whether you can afford your current monthly payments, the interest rates you’re now paying to your creditors, and how quickly you’d like to pay off your bills.

Providers of CareOne Debt Relief Services offer two additional options that may be beneficial if you’re looking to consolidate credit card debt and pay off bills.

A CareOne Debt Management Plan (DMP) helps you pay off debts by consolidating your bills into one simple, monthly payment – often with a lower interest rate than you’re currently paying to your existing creditors. The DMP includes comprehensive debt counseling, customer service, and financial education – all designed to teach you smart money management skills to help you stay debt-free for life.

With a Debt Settlement Plan (DSP), CareOne will negotiate with your creditors to pay back a portion of your existing debt. This is a good option if you have more debt than you can pay down. It’s important to note, however, that a DSP will have a negative impact on your credit. As with the DMP, you’ll also receive financial education to help you get and stay out of debt for the long term.

Learn more about debt relief plans offered by CareOne. Visit the CareOne community forums where consumers facing similar challenges as you share their experiences with credit card consolidation loans and other plans. 

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