If you’ve racked up a lot of credit card debt on several different cards, you know it can be hassle to keep track of them all. Not only does each card have a different due date—they probably all have different interest rates, too.
Is it worth simplifying your credit card payoff process by taking out a debt consolidation loan? While it can be nice to have just one bill to pay each month, there are some pretty big caveats to consider. Let’s take at look at scenarios when it can help you to consolidate your debt, as well as a few instances where it won’t do you much good.
When debt consolidation loans don’t make sense
In more cases than not, debt consolidation loans don’t make sense. They’re certainly attractive: the lure of being able to pay off all of your credit cards is a strong one, especially in exchange for a single monthly payment to your bank or credit union at a lower interest rate. It’s definitely a tantalising opportunity, but it’s not perfect. Remember, debt consolidation loans are financial products, which means financial institutions wouldn’t offer them to you if they didn’t make money from them.
Check your interest rates and payoff plan
Figure out how long it would take you to pay of all your credit cards at your current payment rate. Compare that to the length of the consolidation loan you’re looking at taking out. Your average five-year (60-month) debt consolidation loan, even at a lower interest rate than your credit card, may cost more over the long haul than if you just paid your cards down faster.
You can usually pay down your loan faster without a penalty, but it’s easy to get in the habit of just paying your required minimum each month out of laziness.
Compare that plan to what a loan would offer
Check what your monthly payment on a debt consolidation loan would be.
Are you at least paying that much towards your credit cards now? If the loan payment is more than you pay towards your debts—and it fits into your budget—it might be time to up the ante and just put more money to your credit cards.
Think about your behaviour
Once your cards and debts are paid off, will you cancel the credit cards? Sure, you get credit cards with nice zeroes on your monthly bill in exchange for putting your balances on your consolidation loan.
But one of the biggest problems with debt consolidation loans is that they do nothing to change the behaviours that got you into debt in the first place. Instead, they add another creditor to your pile, and fan the flames of going into debt to pay off more debt.
If you have an inkling of suspicion that you might be tempted to use those cards again after paying them off, or if you’re using debt consolidation as an easy out or way to avoid really looking at your budget, it’s not right for you.
The last thing you want is to take out a loan, pay off your cards, and then charge up your cards again. That does nothing but dig your hole twice as deep.
When debt consolidation loans are a good idea
Despite all those caveats, there are a few circumstances that make a consolidation loan a good idea.
If you’re drowning in debt
If you’re overwhelmed by your amount of debt and your high interest rates on your credit card, a consolidation loan can help you feel more in control. Rates for debt consolidation loans can be as low as 4-7% if you have good credit, according to ValuePenguin. If your credit card interest rate is two or three times that, you’ll see a noticeable difference in how fast you can make progress paying down your debt.
If you have enough cash flow
A debt consolidation loan will give you a fixed payment each month to ensure you pay the entire balance during the loan term. That’s great if you have reliable cash flow in order to pay that amount each month.
If you’ve had your credit accounts for several years, you have a better chance of working with those issuers if you have a problem making your payments. You can use your longer history with that issuer to your advantage if you run into a problem. Some credit card issuers also have hardship programs they can put you on if you’re experiencing a temporary cash flow issue, like a gap in employment.
If you’re confident you will have enough income to be able to make the required payments throughout the life of the loan, you might be a good candidate for a debt consolidation loan.
If you’re still feeling stuck, ask for help
It may seem attractive to just take out a nice big loan, pay everyone off, and only deal with that one monthly loan payment, but all you’re really doing is paying a financial institution to do something for you that you can do on your own. It feels great not to get a bunch of bills in the mail or fret over who you pay when and for how much, but you can do the same thing on your own:
Start by creating a realistic budget.
Then decide whether you want to pay highest interest cards or lowest balance cards first.
Set up automatic payments so you’re paying more than the minimum payments every month, paperless billing so you don’t get the bills in the mail (although you should still review them every month), and let your money manage itself.
Still, even if the maths of a debt consolidation loan works out in your favour, your behaviour may be the real problem. Paying off all of your credit cards and debts with a loan only shuffles the deck chairs around—you still owe money you have to pay, and if you go charging up those freshly paid-off credit cards again, those deck chairs may as well be on the Titanic.
Make no mistake: If you want help with your debt, you should get it. Don’t let social stigma or ego get in the way—there are plenty of ways to get on the right track that go further than blog posts and stop short of putting you back in debt to someone else. Debt repayment and credit counselling programs can negotiate lower interest rates on your behalf, or help you do it yourself.
Debt counsellors can help you with your budget, and help you plan a route out of debt that turns your credit into a tool you control, as opposed to a monster than controls you. If you need the help, get it—and definitely do that before you take out a loan.