The word "consolidate" by definition means to unite into one, or to bring together into a single whole or system. Consolidating your credit cards generally entails taking out one large loan to pay off all---or a portion of---your debt. The benefit of consolidating your credit cards is that you will secure a lower or fixed interest rate, and you will have the convenience of paying off only one loan. Consolidation programs exist for credit cards, loan debt and student loans.
The Facts
In the mid to late 1990s, the National Foundation for Credit Counseling nearly had the monopoly on the business of debt consolidation. Since then, hundreds of competing companies have entered the consolidation industry. Most banks today offer some sort of consolidation program to consumers. Credit card consolidation is one of the most popular consolidation products today for consumers. A credit card consolidation loan is used to consolidate several credit card debts into one.
Significance
With an ever-expanding bankruptcy rate and the debt of the average American skyrocketing, there is a greater need for credit card debt consolidation than ever before. What generally happens is counseling services work out lower payments with the credit-card companies and other lenders, and then these companies will make the payments using a check or electronic funds transfer sent to them by the consumer each month. The lenders are responsible for the vast majority of the counseling service's fees.
Considerations
There are so many options available for consolidating your debt that it can be overwhelming to the average person, and trying to find the best option for your particular needs can be difficult. Debt consolidation programs will typically take the money you send them and disperse it to your credit card companies after negotiating a more favorable repayment plan, attempting to lower your interest fees, and in some cases eliminate late fees. The majority of debt consolidation loans are little more than home equity loans in disguise. These types of loans will usually come with high application fees, and once they get your money they use the equity built up in your current home loan to repay whatever debts you may have.
Misconceptions
Many people are tricked into applying for debt consolidation hoping only to lower their monthly interest rates. This plan is seldom advised, and if you seek only to lower your interest rates, then you need to speak to your credit card company directly and avoid all debt consolidation companies. Debt consolidation should only be used if you are behind on your payments, being harassed by collection agencies, or are unable to make your minimum monthly payments.
Warning
The business of debt consolidation is rife with fraud, misrepresentation and controversy. Many of the advertisements you see on television and hear about over the phone are not legitimate companies and are only looking to get their piece of a $7 billion industry. These fraudulent companies can disappear overnight with your money, and they can destroy whatever credit score you may still have.
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