Credit Card Debt Consolidation
Google the title of this blog post and you are likely to see an extensive list of news stories and blog posts taking all kinds of positions on the issue of credit card debt consolidation. At one extreme is the 'absolutely yes' group while the 'absolutely no' group occupies the other extreme. In the middle, you have all sorts of answers that are not clear either way. So what is the deal? Is it a good idea to consolidate credit card debt using a single loan?
The answer is a qualified 'yes'. It is qualified by understanding a few important things, then making decisions accordingly. Those things that need to be understood are as follows:
- How interest rates and terms work
- The difference between secured and unsecured loans
- The spending habits that lead to debt consolidation
- The purpose and benefit of a budget.
Interest Rates and Loan Terms
There are two things that ultimately determine how much you pay to borrow money. These are interest rates and loan terms. As you know, interest is the amount of extra money you pay on top of what you borrowed. An annual interest rate of 10% on loan of Â£5,000 would result in a total repayment of Â£5,500 if you settled the loan in one year.
The loan term is the amount of time it takes to pay off the loan. The longer the term, the more you ultimately pay by in interest. Remember that interest is charged annually. A good credit card debt consolidation strategy takes this into account.
Secured and Unsecured Loans
Credit card debt consolidation can be accomplished with both secured and unsecured loans. Secured loans are those taken out by using some sort of tangible property as collateral â?? usually, this means the borrower's primary residence. An unsecured loan is not secured by collateral. Does this difference matter? It certainly does.
Unsecured loans generally come with higher interest rates and a requirement for very good credit. Secured loans are more fluid on credit requirements and offer lower interest rates. For credit card debt consolidation, the secured loan is a much better option.
Bad Spending Habits
It is very important to understand that a person's bad spending habits are often that which lead to credit card debt consolidation. If this is not understood, there is a high likelihood that the borrower will find him or herself back in financial trouble in short order. Debt consolidation is just one half of the solution. Changing the way you spend is the other half.
Implementing a Solid Budget
The purpose of a budget is to provide a concrete spending plan that prevents you from spending more than you earn. It is critical to understand that budgeting is essential to successful debt consolidation. If you do not have a budget to work with, there is no way for you to track what is coming in, what's going out, and how your spending habits will dictate your future financial position.
An added benefit of the budget is that it helps you better understand how you are spending your money. For example, a lot of people are unaware of how much money they actually waste on frivolous things until they start tracking their spending. Once they find out where their money is really going, they are less likely to be frivolous with it.
In summary, credit card debt consolidation is a good idea if you understand the big picture. In the absence of such understanding, borrowing more money to pay off what you already owe could just lead to more indebtedness.
Instantly compare 950+ of the UK's best secured loans
Rates from as low as 3.75%