Many people who intend to hold only a couple credit cards wind up with a half dozen or more.
This can happen because they accept balance transfer offers to open a new card, or open a department store account to get a store discount on a purchase.
Then the day comes when they realize they are having trouble keeping track of which bill is due on which date. They find themselves spending more time than they’d like writing checks.
A common solution when this happens is to consolidate the debt, exchanging several monthly payments for one. But all debt consolidation is not the same.
A Debt Management Plans (DMP) through a nonprofit credit-counseling agency is a way to consolidate debts into one payment and, typically, lower interest rates on accounts placed on the plan.
A good candidate for one of these plans is someone who has missed a payment or two, had interest rates hiked and late fees assessed. Making a single payment on the same date every month instead of juggling multiple accounts can provide you with peace of mind.
Taking a debt consolidation loan offers some of the convenience of a DMP. You will be able to make a single payment to your new lender, possibly at a lower interest rate than you owe to your credit card companies.
But there is a good chance you will need to repay the debt within a shorter time frame than your credit card companies allow. Because your new payment may exceed the total of your monthly minimum payments, you’ll want to be completely honest with yourself about your ability to buckle down and make the new monthly payment.
Debt consolidation loans can be risky for people who haven’t changed the behavior that got them into credit card debt in the first place. If you keep your credit cards after you’ve increased your debt capacity with a consolidation loan, you have opened yourself to the temptation to get into much more debt.
Before the mortgage crisis, far too many homeowners took out equity loans — really second mortgages — as a form of debt consolidation to pay off credit cards. But if they resumed using their credit cards and rebuilt balances they couldn’t pay at the end of the month, they wound up with more debt than ever.
In this worst-case scenario, their plan to consolidate multiple credit card accounts into one loan became a debt secured by their home. The new credit card debt undermined their overall strategy to save money through lowering the interest rate on the new consolidated loan.
So before you go down the path to debt consolidation, it’s important that you carefully weigh the problem you are trying to solve against the consequences if things don’t go just right.
You may decide that you’re best off creating a dependable filing system to track your half-dozen credit cards and focus on paying them down so they won’t cause you stress.