Rolling up your credit card debt into a personal loan, often referred to as consolidating, or debt consolidation…
This can be a really popular strategy that people use when they feel the pressure of their credit cards is just too much.
The breaking point
Generally people get to a breaking point where they are just too stressed out and struggling to manage all their different credit cards and store cards, so they opt to roll all of it into a personal loan, usually over a 5 or 7 year period.
The intent is to reduce the interest they’re paying and also to simplify their cash flow management, so that only one monthly repayment needs to be made.
In theory this sounds like a great idea, and when you run the numbers it usually is a better option because interest rates on personal loans are generally about half that of credit cards, sometimes even lower.
So the cycle begins…
The issue though, is human behavior. In most cases, what happens is the debts are all consolidated, but not all of the credit cards are cancelled and so the cycle begins all over again.
I have seen many clients in my years as a financial adviser who have a personal loan, as a result of debt consolidation at one point in time, and then have several maxed out credit cards as well.
Fix your behavior
Reason being, they fixed part of the problem, but didn’t fix the other bit, their behavior. Unless someone is fully ready to stop spending, start saving and stick to their monthly debt repayments, simply consolidating the debt will never work.
If you are in a position where you are seriously ready to repay your debt and start building wealth then using a debt consolidation strategy may be a solution that can save you money and help you get debt free.
The other option could be using credit card balance transfers, which is a whole other topic that we don’t have time for this week. Just beware that there are catches with this strategy, I don’t want you to get caught out with an even larger debt after trying to do the right thing.