Getting into credit card debt can be easy and happens quickly. Getting out of it is another story. The average household carries three and a half credit cards, according to the Federal Reserve Bank of Boston. Across those cards, the average family or household carries a total of $7,394 in debt. Consolidating credit card debt means putting all balances on one card, or paying them off with a separate loan.
Positive Effects
The advantage and point to consolidation credit card debt is ultimately to lower the overall interest rate on all the debt. For example, if a person has three credit cards with interest rates of 15, 17 and 19 percent, consolidating them onto a single card at 12 percent interest will save money by paying a lower interest rate over the life of the debt, even when making minimum payments. Credit card companies are constantly looking to add new customers, and as a result, offer competitive rates on balance transfers for people looking to consolidate their credit card debt. Consolidating your debt can also save you the headache of making multiple payments. With only one payment, you can get a better handle on your budget and how to tackle paying off your debt.
Negative Effects
Many people end up in credit card debt because they have trouble managing their money. For these people, debt consolidation may not do much good at all. Falling behind on your payments, even after consolidating your debt, can cost you as much money in late fees and compiled interest as what you were paying on your old cards. Many balance transfer offers come with a lower minimum payment than standard cards, meaning that while you feel better by paying less per month than you were when you had multiple cards, over the life of the loan you'll actually be paying more than if you hadn't consolidated, and it will take you longer to get out of debt. Consult a consolidation calculator when you know the specifics of your credit card balance transfer options to find out if you'll really be saving money by consolidating your debt. Some people also fall into the trap of not getting rid of their old cards after consolidating their debt, thereby running up more credit and ending up in the same situation, only now with even more debt.
Common Myths
Some people believe consolidation automatically saves you money. But depending on fees and other charges, you could end up paying more, according to BankRate.com. Some cards charge yearly fees and also offer introductory rates that are raised over the life of the credit card. Make sure you have all the information about fees and standard rates before you sign up for a new card.
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