Debt consolidation is a good thing, right? After all, if you can lower your interest rates and pay off your loans faster, then you’ll soon have more money for retirement, college fund, vacations, home repairs and perhaps even a new car.
Therein lies the problem – consumers may think that they are saving money when they consolidate their debt, but that move can cause them to believe they are getting out of debt faster when they aren’t.
Allow me to illustrate:
- If you choose a new credit card and have your funds transferred from one card to another one, your outstanding debt remains the same. That means your $5,000 debt with Bank A now becoms a $5,000 debit with Bank B. Same debt, different creditor.
- In addition, as soon as you make the move from one creditor to the next, your credit rating will be lowered. New credit is a ding to your credit score and creditors may assume you are a higher credit risk, because you consolidated debt. Why else would you make that move?
Credit card consolidation can help you if it lowers your interest rate considerably. For example, if your interest rate is 18 percent and you receive a 5.9 percent offer on your transferred balance, then you can pay off your debt faster by making at least the same monthly payment you were making in the past.
- At 18 percent that $5000 debt would take 10 years (120 months) to pay off.
- At 5.9 percent that same debt would take 6 years, 8 months (80 months) to pay off.
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Big Savings
You shaved one-third of the time off of your repayment without increasing your monthly payments. Importantly, you reduced your interest payments from $3,994 to $811 for a savings of $3,183.
So, what is the problem? Lulling yourself into thinking you can rack up additional debt because you “saved” money by transferring funds from one credit card issuer to the next.
The best way to consolidate debt is to secure a lower interest rate credit card, increase your monthly payments and refuse to take on additional debt. Do all three and you’ll be out of debt much faster then had you done nothing at all.
Adv. — For additional tips on how to save money, please visiting SayLending.com’s money tips section.
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