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4 Ways to Consolidate Credit Card Debt
Consolidating your credit card accounts can help assuage the stress of debt. Roll all of your balances into one and simplify your debt repayments! We’ve rounded up everything to know including answers to your questions, all the benefits of consolidation and the best ways to consolidate and pay off credit card debt.
If you’re reading this, then there’s a likely chance that your household may be among those that have an average of $8,398 in credit card debt.1 Credit card debt, in particular, is considered to be bad debt — but at the same time, credit cards can be a financial lifesaver for people who desperately need to pay their bills and make ends meet. For others, credit card debt is a ramification of poor spending habits and money management.
Either way, if you’re struggling to make a dent in your debt, you do have one option: consolidate. Is your debt on the brink of becoming a financial disaster? If so, let’s talk credit card debt consolidation.
How does debt consolidation work?
Consolidation is a tactic that combines all of your credit card balances into one account. In other words, you can pay off current debt by making a single monthly payment with a new loan or credit card. Consolidating your debt typically gets you a lower interest rate, which can help prevent your debt from growing and allow you to pay more toward the principal. Focusing on one monthly payment can also feel more manageable, rather than trying to juggle multiple balances.
How do I know if I should consolidate my debt?
Consolidation is usually recommended to be the last resort before bankruptcy. It can be beneficial for those whose debt is problematic, but who can still make responsible payments. It’s not the best option for people who can’t make payments on time — or at all. Keep in mind that your debt isn’t gone, it just simplifies your debt payments and ideally saves you some money and can shorten your repayment period. Consolidated Credit offers guidance on determining if your debt is too much, signaling consolidation as a possible solution.
What should I do or know before I consolidate?
Here are a few pointers to keep in mind as you consider debt consolidation:
- It doesn’t magically erase your financial problems. Without discipline, consolidation can be like replacing one problem with another one. If you can’t improve your financial situation or overhaul your spending, then you’ll likely still have repayment trouble. The most important change to make is to stop charging your credit card. Next, make or review and update your budget, so you can make sure that you can afford a new monthly payment.
- What about my credit score? Experian explains that consolidation “has the potential to help or hurt your credit score.”2 Positively, you’ll be able to progress on reducing your credit utilization ratio to boost your score. Negatively, you may have to close credit accounts, which dings your credit score. Make sure to also pay on time to keep your score from dropping.
- Watch out for fees with a new loan and loan extensions. Make sure that you ask in advance about any closing costs, as well as loan origination, balance transfer, annual, late payment and/or early cancellation fees and penalties. There’s also the potential of paying more in the long term; if you extend the length of your repayment term, you may end up paying more overall because of interest, regardless of a lower monthly rate.
What are my options?
You have some options for paying down debt by merging accounts into one:
- Balance Transfer Credit Card: As long as you have a high credit score, you can transfer your existing debt to a balance transfer card with benefits like 0% or lower annual percentage rates. A good goal is to pay off the debt before the introductory period ends to avoid the rising interest rate that kicks in. Therefore, you may want to create a repayment schedule to stay on track.
- Unsecured Personal Loan: Combining your debt into a personal loan is beneficial because of its fixed interest rate and monthly payments, lower annual percentage rate (depending on your credit score) and set repayment period to give your payments structure. Other financial details can help your new interest rate like your credit report, employment history or income. It’s recommended to start with a credit union since these financial institutions generally offer the lowest rates and more flexible terms.
- Home Equity: If you have equity in your home, you may qualify for a home equity loan or line of credit to use toward paying off your credit cards. With a loan, you receive a fixed lump sum and typically a low interest rate. With a HELOC, think of it as a revolving line of credit— borrow what you need within your limit and make payments on that amount. Keep in mind these loans are secured by your home, so you’ll want to make your payments regularly and on time to avoid the risk of losing your home.
- Debt Management Plan: If you aren’t eligible for the options above, it may be worth exploring the debt management plan option by working with a nonprofit credit counseling organization. You work with a credit counselor to review your situation and create a plan that combines your debt into one monthly payment. You pay the agency, and the agency pays your creditor. Ideally, you get a reduced interest rate. Two drawbacks are that you’ll have to pay a fee for their services and may need to close all your remaining accounts, which can impact your credit score.
What are some effective strategies for paying off debt?
Once you consolidate and streamline your debt, it’s time to get down to business and reach that zero balance. It takes planning, support, discipline, commitment and some strategies to put into action. As you start your debt repayment journey, these six strategies can help you reach your zero-debt destination.