Consolidating credit cad debt can be an effective means of getting your finances under control if they are starting to get out of hand because of a lot of financial obligations. You can derive considerable savings when you roll all of your unsecured commitments into a single instrument.
However, it’s important to do it the right way and at the right time. This, of course, raises the question; when is a good time to consolidate credit card debt?
Read more Irwin Insolvency.
Your Credit Score is Strong
One of the primary reasons to execute a credit card debt consolidation is to lower your interest payments. The only way to accomplish this with a loan from a financial institution is to have a credit score worthy of a lower interest rate.
A compromised credit history will require you to pay more interest. Yes, this can still work out in your favor though; depending upon the interest rates you’re paying on your cards. Still, as a rule of thumb, the higher your credit scores the better your position in this regard.
Interest Rates are Low
The best reasons to consolidate credit card debt are to save money and time. Interest rates tend to fluctuate, so you have to be careful to ensure the loan into which you roll your debt carries a lower overall interest than any of the ones you’re paying now on your credit card bills. This is critical to deriving savings.
On the other hand, you must also make sure the length of the loan will not undermine that lower interest rate. The longer you pay on a loan, the more interest payments you’ll make.
Loan Terms Are Strongly in Your Favor
Again, the whole point of doing a credit card debt consolidation is getting a better deal. To do this, you have to scrutinize the situation carefully to ensure the deal you sign is indeed advantageous.
Be certain any high credit card debt consolidation you take on will cost less, including fees, interest rates and overall time than if you’d just paid the bills individually. In other words, make sure the entire cost of the loan is less than you’d pay to maintain your situation status quo.
You Can Afford the Monthly Payment
The best consolidation deal in the world will leave you short if you can’t make the new monthly payment. This isn’t a problem in most cases because the consolidation loan payment will be less than you were paying to stay current on each of your bills individually.
However, these things have a way of taking a turn.
You’re going to have a problem if your income stream experiences a disruption and you cannot pay. This is particularly true if you employ any sort of home equity tool. Failure to meet the terms of one of those deals could cost you your home.
For this reason, it’s important to roll any savings you derive from doing the consolidation into an emergency fund capable of supporting at least three– and ideally six months of your monthly household expenses. This will give you a fallback position if your paychecks stop coming in for some reason.
You Can Stop Spending
Debt recidivism is one of the big consolidation mistakes people make time and again. Using a consolidation loan to pay off your credit cards, only to start charging on them again will leave you cast away on the shores of Insolvency Island.
It’s important understand that rather than paying it off, a credit card debt consolidation just moves your liability to another place. You’ll still owe the money, albeit at better terms. Falling back into your same old bad habits will serve only to dig a deeper hole for yourself.
The best time to consolidate credit card debt is when you know all of the above is solidly in your favor.