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Bad Credit Rating Debt Consolidation Loan
A credit card debt consolidation loan involves borrowing money to put all revolving debt under one roof and make a single repayment. An Experian marketing insight snapshot in March 2009 showed that consumers had an average of 5.4 active bank cards and retail accounts. Consolidating credit card debt, closing down accounts or reducing credit limits can help to simplify finances and pay off debt. However, it is necessary to make an informed assessment of the pros and cons of credit card consolidation loans before proceeding.
Advantages of Credit Card Debt Consolidation Loans
- Lower interest rate. Making the decision to consolidate credit card debt can help a borrower to achieve a lower rate of interest. A consumer can clear a larger percentage of the capital.
- Pay off debt. Charge cards are a form of revolving debt because it doesn't have a defined term. A credit card consolidation loan allows a consumer to clear any money owed over a defined period.
- Reduce monthly repayments. A lower interest rate and/or an extension of the term will reduce the amount of disposable income that goes towards paying off debt each month.
- Straight-forward personal finances. Pay off debt with a single, affordable payment each month.
Disadvantages of Credit Card Debt Consolidation Loans
- Secured debt. Converting unsecured into secured debt is rarely a sensible option as it gives a creditor collateral. In the event of default, this could lead to foreclosure. Secured borrowing also means that debt relief programs will no longer be an option.
- Extending the term. Borrowers regularly increase the repayment term in order to reduce the amount of monthly income that goes towards servicing debt. The longer a debt is allowed to continue, the higher the amount of interest will be accrued.
- Existing agreements. Whilst credit card debt consolidation loans are an exceptional way to pay off debt, they can also exacerbate problems if existing agreements are left open. This could lead to a consumer developing a new charge card balance and a loan.
- Poor credit. A credit card consolidation loan may be more expensive if the borrower has poor credit. Missed and late payments will increase the cost of borrowing to a level that is close to the APR on charge cards. A debt settlement program or Debt Management Plan may be a better alternative.
The Pros and Cons of Consolidating Credit Card Debt - Pay Off Debt vs Secured Loans
Taking out a credit card debt consolidation loan is an effective way to pay off debt, provided existing credit arrangements are revised or closed down. Although consolidating credit card debt reduces debt repayments and simplify personal finances, there are a number of pitfalls that need to be avoided. Consider whether a Debt Management Plan provides a better way of clearing unsecured debt.
Sources
" Credit card statistics, industry facts, debt statistics." CreditCards.com