Debt Consolidation Loans: Are They Right for Your Credit Card Debt?

A lot of people who owe money on their credit cards will try to handle everything themselves. They don't want to ask for help, and they don't think they need it. They tell themselves they'll just pay more than the minimum, and everything will be fine.

There's one major flaw with the idea of regularly sending more than the minimum payment to creditors - procrastinators will continue to wait until the next month to begin paying extra. The low minimum payment amount can be tempting. As long as only the minimum is paid, you will need to continually transfer balances between cards for better rates and never really make a large dent in the balance.

With the rise of personal consumer debt, financial institutions and other companies have responded by offering debt consolidation loans. They work by collecting all of your credit card balances into one new line of credit. Then you pay it off in installments just like you would a car or mortgage loan. In order for this to work well for you, you need to qualify for a high enough loan to cover your entire credit card debt.

If you don't feel you can be disciplined enough to prepay on your balance every month, consolidation may be a good alternative. And if you don't want the hassle of reevaluating your debt and transferring between your credit accounts every few months, a consolidation loan could be the answer.

One part of your goal, as with balance transfers, is to reduce your interest rate. Don't apply for a loan if the interest rate will be higher than your credit card rate; you'd be better off working on balance transfers. If you do apply and get approved for a debt consolidation loan, close out the paid-off credit card accounts - some loans will require this as a condition of being approved.

The absolute worst thing you can do is to run up your credit card balances again. Then you'll be in twice as much trouble. If you have no savings cushion, you can often keep one card with a low credit limit open for true emergencies. Keep in mind, though, that the consolidation loan might require you to close out all your credit cards in order to get the loan. Think carefully before you do that, but it may be worth it in the long run in order to get out of debt.