Credit Card Canada - Canadian Credit Card Reviews and Applications

Credit Card Articles

Credit Card Debt Vs. Consolidation Debt

Credit card debt is basically unsecured personal debt; when a customer of a credit card issuer buys an item with a credit card issued by that company. Due to the high interest rate that credit card debts carry, many people prefer to take out another debt (called consolidation debt) in order to settle their obligations to the credit card company. The present article considers the pros and cons of this debt solution, with its ultimate success or failure depending on the particular circumstances one is faced with.

Advantages of Credit Card Debt Consolidation

In taking out a loan to settle your credit card debts, you will benefit from the following advantages:

• you will avoid the accumulation of interest on your credit card accounts;
• there will be no late payment penalties which credit card institutions charge whenever a customer has not paid their debt on time. In this way, your credit history will remain spotless (it is good to remember that banks and other credit card companies report all late payments to credit rating agencies, which in the future, e.g. when applying for a mortgage, may backfire on the defaulting customer);
• you will not bring into effect a universal default, i.e. the right of a creditor to increase the interest rate a borrower pays, simply because that borrower has been late on a payment to another creditor;
• the interest rate of the consolidation debt will be lower than that of the credit card debts.

Disadvantages of Taking out a Consolidation Debt

Although generally yielding beneficial results, a consolidation debt may not always be the most practical solution. Consider, for example, the following disadvantages:

• a consolidation debt is rarely unsecured and if it is, the loan will have a high interest rate. Typically, you will have to provide some security: collateral such as your home, land, or car serving as a proof that you will repay the debt. This makes the borrowing of consolidation loans a risky and undesirable affair;
• finding a good consolidation loan lender is a time-consuming and costly task, made all the more so, as it often involves the services of a debt counselor;
• some lenders are accustomed to “throwing curve balls" such as a prepayment penalty clause. Under this clause, you will owe an extra fee, should you choose to repay your debt in advance. It is due in compensation for the interest that the lender has lost. In general, any time you sign a loan contract, bring along your most perceptive pair of glasses, since the big issues tend to hide in the small print. Always ask about penalty fees and compare the terms and conditions offered by several providers.
• having fulfilled its purpose, a consolidation debt creates the false belief that all is finely settled now. Such people come to understand the hard way that a consolidation debt is still a debt that requires regular payments and accumulates interest.