Four Good Reasons to Consolidate Your Credit Card Debt

Credit cardsBlack Friday often leaves shoppers in the red. And with the holiday shopping season in full swing, 'tis the season not just to buy presents but to contemplate whether you should consolidate all of that credit card debt in order to save yourself some money.

The primary reason for trying to get out of the debt trap is pretty obvious: Being in debt is stressful and no fun. And consolidating what you've accumulated on plastic is certainly a valid path toward the light. In fact, as Brian McDowell, investment adviser and chief investment officer for the FBR Wealth Management Group, observes, there are four good reasons consumers should think about consolidating their credit card debt.1. You can save money. By far, this is best the reason to do it. "Consolidating higher rate debt into lower rate debt can save you hundreds or thousands of dollars per year," says McDowell, offering the example that if you brought the interest on $10,000 in credit card debt down from 11% to 9%, you'd save $200 per year.

2. You can simplify your life. "Eliminating multiple accounts, bills, automatic drafts, written checks or bill pay, different due dates, etc. can save you time and make overall financial management easier," McDowell says.

3. You might just improve your credit score. "A general rule of thumb is that [having] three to seven total credit accounts enables the credit bureaus to give you an optimal individual score. If you have more than seven, then consolidating down to seven or fewer may improve your score."

4. You might be able to increase deductions. "If you can move non-deductible interest debt such as credit card, auto [loans] and a personal line of credit into deductible debt such as a home mortgage or an home equity line of credit, then you can increase deductions and decrease taxes owed," McDowell says.

With that said, McDowell's good advice does come with a few cautionary warnings. For starters, McDowell warns that you should avoid credit cards or services that offer to consolidate your debt for a fee.

"The claims and abilities of these services are typically exaggerated, overpriced and, in some cases, misleading," warns McDowell, who says that with a little legwork, any consumer can consolidate their debts themselves. And regardless, he adds, if you're going to pay any fees, you should make sure the fees don't offset whatever you're supposedly going to be saving when you consolidate.

Is there any reason not to consolidate? Absolutely. If you aren't careful, you could consolidate and wind up in much worse shape than you had been in. For instance, if you transfer your debt from, say, three credit cards to one credit card, and you're left with two credit cards that each have a $3,000 credit limit, you'd better be disciplined enough not to give in and use those cards, racking up another $6,000 in debt.

If that happens and your credit score takes the hit that it likely would, you may find that you can no longer get another credit card or loan with a low interest rate. So not only will you be deeper in debt, but now you won't have any tools left to help bring it down faster. So consolidate your credit card debt if it makes financial sense, but remember not to repeat the steps that got you into debt in the first place.

Geoff Williams is a regular contributor to WalletPop. He is also the co-author of the book Living Well with Bad Credit.

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