I am sure you have one or more Credit Cards in your wallet as you are reading this. I may also presume that you have outstanding debts associated with them. Well this is no psychic power that I have! It is the order of the day. We all somehow remain tied down or even sunk in a lot of debts that are provided by many lucrative credit programs. These are provided either through Credit Cards or as home loans, mortgages, consumer loans etc. Loans and credit programs continue to allure us with their eye-catching newspaper ads and TV commercials. We like a striking credit deal and take it immediately only to find a better deal the next day. This way we arrive at a situation when we start paying our debts to a number of banks or credit providers by writing those many painful cheques every month. Paying back debts to more than one bank/creditor could be unbearable for many of us. Often this results in failure in payment which multiplies our debt status. In these scenarios, 'debt consolidation? can be useful.
Credit consolidation, as the name implies, is a technique that consolidates your various credits and combines them in one single debt. For example, it would always be convenient if you have to pay $500 to X Bank instead of paying $50, $200, $100, $150 to A Bank, B Credits & Commerce, C Credit Cards and D Bank Ltd respectively. Credit consolidation providers (banks or companies) do just that! And you write one cheque instead of four.
Well for those of you who don?t think it to be an outstanding convenience, there are more! Debt and credit consolidation programs allow you to pay back your loans and debts at a much lower annual percentage rates (APR). Thus you pay less every month. Think of a scenario where you have two outstanding debts to two credit card companies, one amounting $1500 with an APR of 12% for two years and the other amounting $1000 with an APR of 13% for four years. Your monthly payment would be approximately $78 and $32 to two companies totaling $110. Now once you consult a debt consolidator, he/she will come up with an apparently unbelievable offer ? a payment with 9% APR only! You would definitely grab this offer, wouldn?t you? Most of us would. We may wonder as to why the banks and creditors would offer such lucrative credit management schemes. There are extremely high profits for them too. Many of us would give debt consolidation a second thought once its mechanism could be understood.
Simply put, debt / credit consolidation loans usually tie you up in paying back debts for a very long period. As for the previous example, if you have to pay back debts with 9% APR for six years you would find that you are ultimately paying the consolidator a much larger sum of money than what you would have paid in a no-consolidation situation.
Credit consolidation can be useful once your monthly debts are hard to pay for high APR. But it is only useful as long as you can manage your finances well and do not get indulged in further debts with Credit Cards. If you are tempted to spend more with your Credit Cards just because you are paying less for your previous debts, Credit consolidation can invite further unmanageable debts. It is also wise to analyze the strings that are normally attached with consolidator schemes.
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