Are Credit Card Consolidation Loans a Scam?

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The average amount of consumer debt racked up on credit cards is around $7,000 and climbing.

That being said, credit card consolidation is a rapidly growing industry. If you have a credit card, you are likely getting constant offers for some sort of consolidation program.

More often than not, you are trading one evil (unsecured consumer debt) for another (secured debt with collateral attached).

The big question surrounding these types of consolidation offers is whether or not credit card consolidation loans are a scam, or if they are providing a very valuable alternative to the massive consumer credit debt that over a million individuals in the US alone have incurred.

Since we primarily focus on building generational wealth, it’s important to note that this determination may be heavily influenced by long term income and wealth building goals, not short term solutions to reduce interest rate.

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What is a Credit Card Consolidation Loan?

A credit card consolidation loan can simply be defined as a personal loan taken out to pay off the balance of one or multiple high interest credit cards.

Usually, this type of loan is taken out when interest is overwhelming your monthly payment on said credit cards, and the balance does not decrease as rapidly as you would anticipate.

Most of the time, people look to personal loans because they have trouble managing multiple payments at once, or the interest rate offered by a credit card consolidation company is very low when compared to the card’s interest rate.

This isn’t something that many do when they have $500 worth of consumer credit debt. Often times the balances of personal loans taken out can be upwards of $50,000-$100,000.

This sort of debt can be crippling. Consumer credit can be touted as a primary driving factor behind the decline in asset acquisition like real estate purchases or ETF/Mutual Fund investments.

Consumer credit is especially popular amongst millenials who, atop student loans and everything else, can take on a lot of costs early on due to high rent prices, lack of cash or savings, and overall lack of inheritance or wealth left behind by the baby boomer generation.

Also, depending on your state of residence, you could be paying very high State and Local Taxes (SALT) that takes a serious dig at your income before you even have the chance to see your paycheck.

This also makes these demographics a primary target for debt consolidation.

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Is Debt Consolidation a Scam?

Personal loans for credit card consolidation purposes are actually not a scam.

However, there are a couple important key points that should be discussed before diving into a loan of this sort.

Behavior:

Most who fall into the credit card debt trap usually end up there as a result of behavior.

The most important thing you can do to avoid consumer spending is to stop consuming at an unnecessary rate.

To be fair, there are sometimes unforeseen circumstances that can force you to use a credit card in the case of emergency, and this is understandable.

However, if you have high credit card debt and you reflect on the purchases you made utilizing this card, it’s very likely that you can quickly realize there are a few of these purchases that could have been cut out if you were to make a conscious effort to change spending habits.

Living at or below your means is a very important part of building generational wealth. I have addressed the subject multiple times, and often the questions surrounding generational wealth allude to high debt and no savings.

If you have read any of the best business books I outline here, you will know that almost all of them have one common theme: Pay down debt and build an emergency fund. This allows you to take care of any expenses that pop up unexpectedly without having to use your credit card.

It sounds easier said than done, that’s understandable.

When I had massive student loan debt, the first thing I realized is that my $300 monthly payment was $300 that I could have been investing in appreciating assets or putting back into my online business.

I made that student loan debt a target and managed to live below my means, devoting a large quantity of my monthly income to that debt, ultimately allowing me to pay it off than less than a year.

Read more on that story by clicking here.

The bottom line is, if you are purchasing groceries and basic needs on consumer credit, you may be behind for good reason.

Maybe you need to be seeking out ways to increase income like building your own online business as a side hustle or becoming part of the gig economy.

If that’s not the case, and you are simply spending on unnecessary consumer items like the latest new shoes at the mall, or buying expensive furniture you cannot afford when what you had in place was perfectly fine to begin with, you may be spending irresponsibly and a change in behavior is a necessary course of action.

If you don’t change your behavior, consolidation debt can be more dangerous than beneficial.

Proper Credit Card Usage:

There are ways to properly use credit cards. If you are in a situation where you are examining the potential benefits of consolidating this credit card debt, it may be likely that you have not been using them properly.

In order to properly use credit cards, you must be very disciplined.

When I worked in a bank, my branch manager was fantastic at offering credit advice.

I first approached him about a credit card because I was pre-approved by the bank to sign up for one. I had always heard that credit cards are evil and you should never touch them. I quickly learned that was not true.

There is a way to properly use a credit card and there are a couple benefits to doing so.

Singing up for a credit card can help with building your credit score when your young. Being 19 when I received my first credit card, I did not have many expenses. I simply used my credit card only for gas and paid the balance in full every month.

My credit score swiftly jumped to around 750 over just a year or so.

A good or great credit score can be extremely valuable when looking to apply for mortgages and debt streams in the future that are considered “good debt”.

Now Dave Ramsey would say that no debt is good debt and you should only pay cash for the things you purchase, but I disagree with some of his points.

Taking on debt for a mortgage has increased my networth tenfold. In order to get this mortgage I first had to have a good credit score.

Using my credit score only for the essentials and making sure to pay it off in full every month allowed me to ultimately receive a good interest rate on the first property I purchased. Since I was able to purchase when I did, I have now seen the property appreciate over 33%.

This is an example of debt working for you and the real value of your debt decreasing with inflation.

So, if credit cards are used properly they can lead to opportunities that allow you to increase your net worth and invest in what are generally appreciating assets.

If, however, you are using that solid credit score to buy an unnecessarily expensive car… well then the same logic may not apply.

Now that behavior changes have been clearly outlined, and potential proper usage of credit cards has been discussed, it is important to understand that there are options out there that can be used to get you back on track and out of the credit card debt weeds.

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What Options Exist?

There are countless companies out there offering credit card debt consolidation.

Often times they make money on the interest rate they are charging you which can actually still be pretty high compared to a mortgage, used car, or other personal loans.

The key difference is, they are reducing your credit card interest rate by a SIGNIFICANT amount, it’s usually pitched as a win win for both parties, and it can be if you are disciplined and make certain to perform your due diligence.

If you are seeking a personal loan to reduce credit card payments, but plan to begin using your credit card again immediately after signing up for the personal loan, STOP READING HERE AND REREAD ABOVE SECTIONS. 

Now, if you are seeking to reduce consumer credit debt with a personal loan and plan to be responsible with credit card usage after the fact while building an emergency fund then there are companies out there that offer high quality services and options for consolidation.

It’s important to understand that not all companies are created equal. Watch for the fine print within this industry, if a corporation’s name is not well respected you must be careful.

Personal loan companies are heavily regulated, however, they can sneak in bad business practices that will leave you stuck with a loan ultimately costing you a great deal more than what the credit card debt was.

My first recommendation is still (if possible) to pay down your credit card debt using the snowball or avalanche method, but if this is not reasonable then SoFi would be the next best option.

There are a few benefits to using SoFi over less reputable companies (even if the rate is a point or two higher):

Some of the important points in the infographic above are the easy experience and the no fees policy. The origination fees and pre-payment penalties are a few of the fine print line items that can cost you a fortune.

If you plan to pay off the personal loan early (as you should with the interest you are saving) then you will need to make sure no pre-payment penalties exist.

SoFi is also very helpful in the event that you become unemployed.

When the government was shut down for an extended period of time in early 2019, they helped place payments on hold for government workers until their paychecks were restored.

So what offerings exist with SoFi?

There are a few options outlined above that I would recommend against entirely. 401(k) Loans and Home Equity Loans are a HUGE NO.

In the event of bankruptcy or foregone payment, these types of loans can garnish your 401(k) or foreclose on your home. You never want to trade unsecured credit card debt for secured debt, period.

When looking at SoFi you will want to make sure that this personal loan also does not become “secured debt” which means it is tied to the assets you actually own.

Understand that there are potential savings with SoFi. The benefits can be quite helpful, but you have to make sure that you have a plan for managing your finances going forward and that you will not do as most individuals do and take on more consumer credit debt once everything is indeed consolidated.

Check out an example of the savings potential of SoFi here:

If SoFi and credit card debt consolidation sounds like the right plan for you, you have come to the right place.

Click the banner below to sign up for SoFi and save the smart way today!

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Questions, comments, or concerns? You’re invited to share in the comments section below.

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