Should You Consolidate Credit Card Debt? Use an Amortization Calculator to Find Out

Credit Cards and Credit Ratings

Closing credit accounts can negatively affect your credit score. Besides keeping your cards active, the credit rating companies look at how much of your credit limit you use. A safe ratio is no more than 30 percent. So, don't close revolving accounts, but pay them down--which will save you money in interest while enhancing your credit.


Pay Down High Interest Rate Balances

There are a number of ways to attack high interest rate balances. You can pay down the account with the highest interest rate first. Or, you might pay down the highest balance first. For example, carrying a $5000 balance at 19 percent is more expensive than a $2500 balance at 24 percent. Use a loan calculator to guide your decisions about what to pay off.

When You Don't Have the Cash to Pay High Interest Accounts

If you are only able to make the minimum payments on your current balances, and your interest rates have gone up, you will obviously be paying more and paying longer to retire your debt. Right now the the difference between interest rates on consumer credit cards and home loans is relatively huge, 15% or more. If your card balances are high and you cannot pay them down soon, consider a debt consolidation through a home equity loan or a home equity line of credit.

Use an Amortization Calculator to get your Amortization Schedule

One quick way to assess options is to use an online debt consolidation or loan comparison calculator to see if a home equity loan or a HELOC makes good financial sense. Plug in all your consumer credit with interest rates higher than current rates on equity loans, then see what the difference will be in interest and in monthly payments. Of course, your consolidated monthly payment will be lower than the sum of individual payments, but what you want to look at is the cost of money over time.

Debt Consolidation: Calculate Carefully

When you sign the note for a home equity loan or HELOC, you are putting up your home as collateral. If you become unable to pay on your consolidated loan, you might jeopardize the roof over your head. So, there is more to the decision than just lower monthly payments or the total amount of interest that you will pay. That said, if you are pretty sure that things are stable for you for the foreseeable future, debt consolidation might save you a significant amount of money and make life a lot less stressful.

Financial Future Is Uncertain--Should You Refinance?

Perhaps you are considering debt consolidation because your income has been reduced due to a cut back in hours or a job loss and you can't keep up with you current minimum card payments. Or you have some other major and unexpected financial strain affecting your cash flow. Is debt consolidation good for you? That depends. If you are unable to pay your revolving credit obligations, the interest will keep accruing, driving you further in debt. Extending this out to the worst case scenario, if your creditors are forced to charge off your debts, you may denied credit in the future, or if you are able to get it, you will pay the highest interest rates. Debt consolidation can be a viable option even in less than ideal circumstances if you know you will be able to make the minimum payment on the consolidated loan. Again, use an online loan calculator to view the outcomes of various scenarios to figure out what makes the most sense in your particular situation.

Timing is Everything

In order to qualify for a equity loan, you must submit an application. Some factors that are considered are your current loan to value ratio, your credit score and your work history. You are essentially applying for another home loan. So, if you think you are going to need a debt consolidation loan, apply for an equity loan or line while your situation is still appealing to the lender. Finally, keep in mind that while home loan rates are some of the lowest in recent memory, it is becoming harder to qualify for the best rates. If you want to lock in, apply sooner rather than later. If you are not offered the terms you seek, you do not have to sign the loan documents.


Posted By :
Lorraine Watkins is a regular contributor to business and education websites. She is a notary in California specializing in loan documents. She holds an MA in English from California State University, East Bay.

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