Many people are in real financial trouble right now, and are wondering if a credit card consolidation loan is right for them. It seems like it would be a good idea to consolidate your debt in to one low monthly payment. Some of these loans have real drawbacks, though.
A credit card consolidation loan that is secured against the equity in your home is a really bad idea, in most cases. Taking out a loan against your home to pay off credit cards is a gamble. It is increasing the chances of you falling behind on your mortgage if something should happen to your job. Also, you payments may go down, but you will be paying 30 years of interest, so your total interest paid out could be tens of thousands of dollars more than if you had just kept paying off the cards.
Many people tempted by credit card consolidation loan offer get stuck on the promise of lower monthly payments. But they often don’t think of the cash they could save each month in terms of saving it. They often see it as additional money they could spend. This just re-enforces bad spending habits. It is not addressing the true problem.
The true problem for most people looking for a credit card consolidation loan is poor spending habits. They use their credit cards to make purchases they don’t have the money for. Borrowing money on your credit card is some of the most expensive money you can borrow. And right now, banks can increase your interest rate, sometimes by 20% or more, any time they choose. It leaves consumers in a very dangerous situation right now.
A credit card consolidation loan is only advisable if you are not going to use credit cards ever again.