You may be having trouble paying your credit card bills if you have a number of different accounts, all with high balances. You may be juggling multiple due dates and making sure you pay at least the minimum due on every account. Credit card consolidation can make it easier in many ways, but it also has its pitfalls. You must weigh the pros and cons before you move forward with credit card consolidation as a debt management strategy.
Definition
Credit card consolidation simply means combining all your credit cards into one account. This is often done through a home equity loan or second mortgage, the Federal Trade Commission (FTC) says. You can qualify for such a loan even if you have had some credit problems because your home is used as collateral. You pay off your credit cards with the consolidation loan funds.
Effects
Credit card consolidation will help your credit score in the long term as long as you make your loans payments when they are due and do not run up more debt. Fair Isaac Corp. (FICO), which compiles credit scores, recommends leaving the credit card accounts open because closing them shortens your credit history, bringing your score down. On-time payments on the consolidation loan can boost your score considerably because your bill-paying history makes up more than a third of your credit score. However, you can harm your score if you miss any payments or send them in late.
Benefits
Credit card consolidation is a beneficial budgeting tool. You do not have to juggle multiple due dates and payment amounts, which reduces the risk of paying late or totally skipping a payment. Credit card payments can change from month to month, but a consolidation loan payment stays the same. This makes it easier to work into your budget. You have a fixed term and will be debt-free by the end of it as long as you make your scheduled payments and do not run up additional credit card bills. A consolidation loan may also have certain tax benefits, according to the FTC.
Drawbacks
Credit card consolidation allows you to pay off your credit card accounts. It can be tempting to have a zero balance and a high open line of credit. You can get in a worse financial position if you consolidate your debt and then run up more. It is not a good idea to close the accounts because that can hurt your credit score, so you must have the discipline to put them away. They should only be used twice a year to make small purchases that keep the accounts active, advises Clark Howard, consumer advocate radio host. Pay the purchases in full as soon as you get the statement and put the cards away again.
Warning
The FTC warns that you could lose your house if you do not handle credit card consolidation properly. You agree to put it up as collateral when you borrow money in the form of a second mortgage or home equity loan. This gives the bank the right to foreclose if you do not make your payments as agreed.
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