Credit card consolidation is the process of centralizing credit card debt so that it can be managed through one easy payment. While this process can eliminate much of the stress that comes with overwhelming debt, there are both benefits and drawbacks to credit card consolidation. Thus, consumers should be fully aware of the different ways it can impact their future spending abilities, credit ratings, and financial health.
Choosing The Right Provider
Credit card consolidation is through a third-party payment system, meaning that the lender or consolidation company you choose will likely assume your debt. Therefore, your payments are made to the consolidation company. In other arrangements, consolidation companies will act as mediators between consumers and their creditors and will garner profits from individual payments. It’s important to remember is that a consolidation company always stands to gain when providing its services.
In order to boost their profits, mitigate the risks of dealing with high-risk consumers, and provide appealing offers to their clients, these companies will typically negotiate lower settlement amounts with each creditor, thereby lowering the total debt that must be paid. The average payment is approximately 2.5% of the total debt amount, which is usually a much more feasible arrangement than directly paying account minimums to each individual creditor. In certain instances of consumer hardship, however, the monthly payment could be significantly lower.
The primary drawback is that most of the related accounts will not be recorded as paid in full. Since consumers will only be paying a portion of their total debt, their accounts will be recorded as having been charged off. This will diminish all efforts to improve their credit ratings. However, making an effort to pay accounts off in any fashion is certainly better than making no effort at all. It is important to note, however, that this is a common trade-off for using consolidation services.
When negotiating for lower amounts, consolidation companies will often work to reduce late fees and other special charges because most companies will insist on repayment of the full principal balance. Among the benefits of credit card consolidation is the ability to put an instant stop to collection calls and other collection efforts and, in some instances, to regain lost purchasing power. More importantly, credit card consolidation is a simple repayment process that is both steady and efficient.
When considering credit card consolidation, you should consult with a financial or credit adviser. Not all of the available consolidation opportunities will provide the same short and long-term benefits. Moreover, some offers could wind up costing consumers far more over time. Working with a financial counselor will provide you with a comprehensive assessment of your overall financial standing, and he or she can help you analyze your consolidation options and choose a plan that works best with your current and future financial goals.