Mortgage Dictionary -> Debt Consolidation
If you have 5 or even 10 credit cards, you may be getting overwhelmed making payments on each one every single months. Many other Americans are in the exact same shoes as you are, as the average American has 8 credit cards in their wallet. Even making regular payments on 3 or 4 credit cards can be a daunting task, particularly if the minimum payments on each are too expensive for you to afford. That's why many people use debt consolidation to make getting out of credit card debt easier. However, like any other method of getting out of debt, it does have its disadvantages.
What is Debt Consolidation?
Debt consolidation is basically taking out one loan to pay off many other loans. In other words, rather than paying several different credit card bills individually, you're taking all of them and combining them into one payment every month. Debt consolidation makes use of an outside lender who creates a loan that pays off all your credit cards, so that your responsibility is now with the lender, rather than the credit card companies.
The Advantages of Debt Consolidation
Obviously, if you have 5 or more credit cards, it can be difficult remembering to pay them all on month every time. Debt consolidation helps greatly with this, as it rolls all those payments into one monthly payment, rather than 5 or more.
Another advantage of debt consolidation is that it can give you a much lower interest rate. Some debt consolidators offer interest rates of 8% - a lot lower than the traditional 18-25% interest rate on most credit cards. In this regard, debt consolidation can save you money.
The Disadvantages of Debt Consolidation
Of course, there are disadvantages to getting debt consolidation. One is that some lenders require you to put up some sort of collateral such as your home, or something else very valuable. If you play the situation wrong (as in, you don't make payments on time), you could end up still in debt and without your home.
Additionally, some debt consolidators give you a higher interest rate, which may be even higher than what you're currently paying on your credit cards. This means it will actually take you more time to pay things off.