We all understand the advantages of credit card debt consolidation loans. Credit cards charge very high interest rates. Debt consolidation loans typically charge interest rates that are lower than standard credit card interest rates, so by getting a debt consolidation loan to pay off your credit cards, you can dramatically reduce the amount of interest you pay each month.
It sounds great, but there is one debt consolidation trap you should watch out for to make sure debt consolidation helps you, instead of making matters worse.
It’s called the “low monthly payment trap”, a common ploy of finance companies. Let’s say you owe $30,000 on five credit cards. Your minimum payments are $1,350 per month on these credit cards. A finance company offers to loan you the money to pay off these cards, and your payments will be reduced to $1,000 per month on a five year loan.
Sounds great, right? Wrong, because you just agreed to pay $1,000 per month for the next 60 months, or $60,000 to pay off $30,000 in credit cards. It would have been cheaper for you to continue paying your credit cards directly.
Yes, you did lower your monthly payment from $1,350 per month to $1,000 per month, but you will be paying a lot more, over a longer period of time, than if you had not gotten the credit card debt consolidation loan.
How can you keep from getting taken in by this trap?
First, don’t sign any new loan document until you have had a chance to read it. You should take the loan document home with you to read it. Don’t let the loan officer pressure you into signing something you have not had a chance to read.
Second, do the math. Multiply the number of payments you will be making by the number of months you will be making payments. In our example above $1,000 per month sounded like a good deal, but when you multiply $1,000 by 60 months you realize that $60,000 is twice as much as you owe.
Third, shop around. You don’t have to take the first loan that’s offered to you. Make some phone calls to see what rates are available. (Don’t apply for lots of loans, because that will lower your credit score, but do phone around to see what rates you may qualify for).
A credit card debt consolidation loan may make a lot of sense, but only if you research your options, do the math, and make an informed decision.
Bernard Johnson has many years experience advising people on debt consolidation loans. Visit http://www.debt-consolidation-loans-information.com for information about debt consolidation loans and credit card debt consolidation.
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