The accumulation of credit card debt is a serious problem for many people. While credit card consolidation loans can help people pay off debt over time, there are five disadvantages of debt consolidation that people need to be aware of.
No Debt Reduction
The first disadvantage of consolidating credit card debt is that it does not lead to the reduction of any of your personal debt. If you have accumulated a lot of credit card debt, finding a way to reduce the amount of money could be in your best interest. If you decide to go through a consolidation plan, you will not end up seeing a reduction in the amount of money that you owe. In fact, since the fees charged could be lumped into your consolidation loan, your total personal debt may actually increase.
It Can Hurt Your Credit
Consolidating credit card debt can hurt your credit score. If you pay off the credit consolidation loan as agreed, your credit will likely improve over time. However, over the short-term, taking out a consolidation loan could actually hurt your credit. This is because you will suddenly have a new unsecured personal loan on your credit report, which is a red flag to creditors and will impair your score for a certain period of time.
It Can Be Expensive
The third disadvantage is that it can be expensive to consolidate your personal debt. A firm that specializes in credit consolidation is likely a for-profit firm that is looking to make money by providing you with a loan to pay off your credit cards. While the consolidation loan interest rate may be cheaper than a high credit card interest rate, the rate that is charged is still high compared to other types of debt. Furthermore, you may end up paying a pretty hefty service and upfront fee, which can end up being more than five percent of the total amount that you borrow.
Unaffordable Loan Payment
Consolidated credit card debt can result in an unaffordable loan payment. If you are simply making the minimum payments on your credit cards, it will take a very long time to pay off the debt, but you will not have to spend much money each month on principal payments. Once you take out a consolidation loan, it will have principal payments that target a five to ten year repayment window. While this will lead to a faster reduction of debt, the payments will be high.
No Lifestyle Change
Consolidating your credit card debt does not require you to make any changes to your lifestyle. People with credit card debt likely got into that position due to over spending and poor financial habits. If you take out a consolidation loan, there won’t be any requirements to change your spending habits and you could end up back into personal debt quickly once again if you don’t make any lifestyle adjustments.