Consolidating Credit Card Debt: Yes or No?

Consolidating credit card debt can be a very tempting option, and there are several choices, each coming with advantages and drawbacks. It's possible to consolidate debt with a home equity loan, which is a revolving account where your home is the collateral. Debt consolidation companies will negotiate with your creditors on your behalf to settle and pay your debts with one payment per month. Debt management programs are structured, administering the payoff of your debts. Here are some of the pros and cons of consolidating credit card debt.

The Pros

1. You are making just one payment per month, to just one creditor. The payment is often reduced, and if your company can negotiate a good settlement, you can end up saving up to sixty percent. You will stop collection agency harassment; they will be referred to your debt settlement company.

2. The loans and lines of credit can repay not only credit card debt, but medical bills and mortgages as well.

3. Debt Consolidation loans usually offer better terms than bank loans or credit cards, so you may end up paying less interest on your debt. With an equity loan, you can also get a lower interest rate, and the interest you pay is usually tax-deductible.

The Cons

1. Credit card debt consolidation shouldn't be entered into lightly. The main drawback to consolidation is that if you choose a HELOC or equity loan, you could lose your place to live. With a consolidation loan, the lender requires that you put the title of your home up as collateral.

2. If you don't own your home and your credit rating is poor, you will likely pay more interest on any loan you do get. Once you apply to consolidate your debt, your lender will realize the full extent of your financial difficulties. The lender may decide that you are too much of a risk, and leave you with no choice but to pay higher interest. Be sure to look for hidden fees and prepayment penalties.

3. Many debt consolidation companies claim that the consolidation will not affect your credit score, but this is usually not the case. Unless you're paying all your cards off, in full, any settlement you make will show up on your report and your account will likely be frozen.

Just as is the case with other businesses, not all DMPs or debt consolidators are ethical, and not all live up to their claims. If they make late payments on your behalf, you will end up even further in debt.