Many of us have been there. Just when debt payments seem to storm down on you in an insurmountable way, you receive an offer for a lower interest loan or credit card. Sometimes the offer comes with 0% interest for a certain period of time. Sometimes, the line of credit extended is enormous. At least for a little while, the clouds of debt seem to part to allow a view of sunny skies. But before paying off one loan with another, there are some things you should consider.
While you can often use one loan to pay off another, be sure to read the fine print of your contract first and be wise about your spending habits. Although there aren’t many rules to govern debt consolidation loans or how the money is used, there may be lender-specific policies to be aware of, says Michael Bovee founder and president of the free online self-help guide, Consumer Recovery Network.
For example, “a bank may require the money be used to pay off existing debts, and even facilitate the payments to other lenders,” he said. You’re about to take part in a “balance transfer boogie, a dance with your debt that wears you down and can exhaust your finances,” says Bovee.
Before Making Any Decisions
It may be best to speak with a credit counselor who can help you to create a loan repayment plan to meet deadlines. Those tempting 0% transfer offers can be a good tool if you plan on repaying the debt. But they often expire, and if your loan isn’t repaid by the expiration date, it may get nailed with high interest, making your debt even higher. You also often pay a transfer fee that can be 3% of the transfer, which might also be costly (3% of $2,000 is $60,) but perhaps not as costly as what you’re paying in higher interest each month. It’s a good idea to check the interest category of your credit card statement to compare.
If You Tend to Overspend
Find a way to curb your impulses when you’ve cleared the credit card or extra cash or you may find yourself in even higher debt.
“I often see the problematic side of debt consolidation loans,” says Bovee. “My biggest caution is how tempting it can be to use credit cards after the balances are paid off. Too many find themselves in trouble with the loan to pay, and credit card balances that grow to unmanageable.”
Be sure to always make timely loan payments, and know that taking on too many debts can also ding your credit score, which can interfere with your ability to get lower interest loans in the future. If you’re curious about what your credit score is now, you can check your credit report card summary, for free, on Credit.com, where it is updated every 14 days.