5 Steps to Consolidate Credit Card Debt

5 Steps to Consolidate Credit Card Debtn

Paying off multiple loans is difficult. You need to remember how much debt on each of your credit cards, don’t miss payments and calculate a different APR. What if you consolidate all those loans and reduce the APR to make paying off the debt easier? This method is called credit card debt consolidation. 

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Why is it effective? 

  • Instead of several small debts, you get one, usually with a lower APR and lower monthly payment. This makes it easier for you to pay off the entire debt, you spend less on interest and more on the body of the loan itself. 
  • Your FICO score may drop a bit after getting a new loan, but it will increase later if you don’t skip payments. 

We’ve highlighted 5 of the most accessible and most effective methods of how you can pay off your card debts. Read more about each of them and determine which one is best for you. 

Balance Transfer Credit Card

If your FICO score is above 670 points, you can try to get a special debt transfer card from banks. How does it work?

  1. You choose a balance transfer card that works best for you. Be sure to calculate if it is beneficial for you to send all your debts to a new bank under the new APR. If your FICO score allows or you are a credit union member, try to get a card with 0% APR and return the money until the introductory period is over. 
  2. Next, you ask the bank to send debts from your other credit cards to this new one. After the transfer, you can start paying off your loans with the new card under the new terms. 

What are the pros of this method? The main one is that there are many offers with 0% APR for 6-12 months, and if you can use this variant, it may be the most profitable option for consolidation. But if you can’t repay the money during the period of 0% APR, it is better to choose another option because the interest rate goes up to 10%-20% after the end of the introductory period. 

Another disadvantage of this option is that such cards are often issued only to members of credit unions, which are very difficult to enter. If you want to get it at a regular bank, the interest rate may not be 8%-19% but 16%-25%, and there will be no introductory APR period. 

In general, this option is best for you if: 

  • You have small debt on all cards (up to $1,500) since you can’t transfer large amounts at once. 
  • You are eligible for offers with 0% APR. If not, it is better not to use this option, as it will be more profitable to take a loan for several years. 
  • You will be able to pay the debt for the period of the 0% APR. If not, use the other option because the rate will be very high and unprofitable. 

This method will not be bad for your FICO score if you use it once. But if you do it every 6-12 months, the banks will see it on your report, and you will get rejections, and your score will decrease.   

Credit Card Consolidation Loan

If your credit score is fair or good, and you are eligible for personal loans, you might consider this option to pay off debts. The solution is the same as the previous method – you find a new loan, get it, and use the money to pay off all your old debts. 

The result is that instead of several credits, you have one with a lower APR and fixed monthly payments. 

What are the disadvantages of this method? 

  • You may find it difficult to choose good loans. For example, if you research on your own, you may not read the contract with your lender carefully and not notice the various fees and penalties that go along with the loans. 
  • Not all borrowers get good loan terms. For example, you will have difficulty getting a low rate if you have less than a 670 FICO score. 
  • Credit unions offer the best terms, but they are challenging to enter. 

A definite plus to this option is the variety of choices. If you do your research on this topic seriously or seek the advice of a consultant, you will be able to find the financial institution with the best terms for you. 

Do not use this method if you already have bad credit. Chances are, you won’t get money at less than 20% APR, which won’t help you pay off your debt faster and will even lead to more loans. 

Home Equity Loan or Line of Credit

This is one of the most advantageous loans in terms of interest rate and size but one of the most dangerous because, in this case, the equity in your home becomes collateral. 

As usual, you begin the credit card consolidation process by choosing the best terms for the new loan. Since your home will be the collateral, in this case, the APR and the amount of money you can borrow will be pleasing. 

However, what you should consider before choosing this option:

  • After you pay off your credit, you’ll still need to pay off a home equity loan. If you do not do this, you could lose your home. 
  • You may have to pay closing costs with a home equity loan, which can be hundreds of thousands of dollars.
  • If you have already taken out a home equity line of credit to pay off debts, you may not be able to use it in more critical situations. For example, if something breaks down, you want to start a business, or you just want to renovate your home. 
  • A home equity loan is a considerable amount of money, and it can be challenging to pay back if something should happen to your job or the house itself (such as the price of the home going down). 

Of course, a huge plus of this option is that there are no credit checks, meaning you don’t need good credit to qualify. However, we still don’t recommend this method as a primary one because the risk of losing your home is too high.  

Consider 401(k) Savings

Be warned that you should only consider this option if all the previous ones have not worked out for you. 401(k) Savings are your retirement savings deducted from your paycheck while you are still working. The scheme remains the same – you pay off old debts with a new loan with a lower interest rate. 

The advantage of this method is that you can borrow a large amount, up to half of your savings. In addition, this loan will not affect your FICO score, and the rate can be as low as possible, 5.5% to 7.5%. 

However, it has more disadvantages. First, you’ll have to pay hefty penalties if you don’t repay the borrowed money by the deadline. Second, if you quit your job, you will have to pay back the money borrowed from your savings within a few months. Third, this loan can significantly reduce your savings for retirement, and even if you think it’s still a long way off, it’s still considerable risk. 

Generally, it’s better not to use this option and, if your credit score allows, to take out a loan for the same five years but at a slightly higher APR.

Smart Debt Management Plan

This is one of the best options for dealing with credit card consolidation. However, as part of it, you have to go to a specialized firm that will help you make a repayment plan and reduce your monthly payments to a comfortable level. 

How does it work? 

  1. You go to a specialized organization for free credit counseling. During the first meeting, the firm’s financial expert will go over all of your debts and make a plan so that you can work together to improve your financial situation. 
  2. If the expert has determined that this option is the most beneficial for you, he will choose your comfortable monthly payment level. His goal is to reduce your high interest rate loans.  
  3. On your behalf, the expert team will communicate with the lender to agree to waive penalties and fees and reduce APR or other changes to the loans’ terms. 
  4. Once the lender agrees, the program is considered officially started. You pay for the services of this company and then pay off your debt according to the plan you made. 

The advantages of this method are many, as it helps to reduce your interest rate, consolidates your loans into one, and does not harm your credit score. The only downside is that there is a fee for the services of the companies that help you consolidate your debt. 

Overall, suppose you have the opportunity to pay for professional help. In that case, we recommend that you do so because they know better what credit card consolidation loans are worth getting, what actions to take, and how you can obtain the results you want faster.  

What Is Credit Card Debt Consolidation? 

Consolidating credit cards is taking out a new loan to pay off existing loans. The process is simple – you look at offers on the market, choose an option that allows you to borrow the amount of all your loans at a lower APR than you have now, and use the money to pay off all your debts. The result is that instead of several smaller loans, you have one large, but with a lower APR and lower monthly payment. 

You should not use this option in several situations: 

  • You have a low credit score, and the only chance of credit card consolidation is to take out a home loan or use 401(k) Savings. In this situation, you will have a hard time getting a loan with a low APR, so the risk of ending up in even more debt is as high as possible. 
  • If you continue to use the credit money instead of gradually paying off the new loan, you’re unlikely to pay off all your debts successfully. Instead, you are more likely to end up in a giant debt trap. 

Before you decide that you want to start paying off your loans, think about how much money you can give each month to pay them off. Next, look at all the options with that monthly payment (personal loans, balance transfer cards) and choose the one that will pay off the least amount each month. 

Suppose you realize that you do not know much about finances and can make a mistake when choosing credit card consolidation loans. In that case, it is better to ask experts for help, such as credit counselors or debt management companies. 

How to Consolidate Credit Card Debt?

The consolidation process involves taking out a new loan to repay your existing ones. You first need to choose the best option with the lowest APR. The most common ways to do it are: 

  • Using a balance transfer credit card. This method will work for you if you have more than a 670 FICO s
  • core. It involves transferring debts from your old credit cards to a new one with a lower APR. Besides, if you are a member of one of the well-known credit unions, you can get an offer with 0% APR for the first 12 months. Paying off the debt during that period will be the easiest and most efficient way to get consolidation. 
  • Getting a new loan. Your task is to find an option that allows you to borrow enough money to pay off all your debts at a lower APR than you have now. Typically the best unsecured loans in this situation are installment loans, which can be paid back over several years in small monthly installments. 
  • Equity in owned vehicles or houses. These are the loans with the lowest interest rates but are also the riskiest because you use your property as collateral. If you do not pay it back, you will lose it.  

Other ways to consolidate old credits include using 401(k) Savings. However, this method is one of the most unpredictable and risky for those who can quit their jobs within five years. One of the above options is better to use, or you can seek professional help from debt management companies. 

Is Credit Card Consolidation a Smart Financial Decision? 

Any solution that helps you pay off all your loans faster and at a lower cost is excellent and reasonable. However, there are a few nuances. 

First, you need to understand that the option of consolidating what you have chosen is beneficial and makes your life easier. For example, if you took out a balance transfer card with a 0% APR for 12 months, and you manage to pay off all your debts in that period, it is a profitable option. But if you decide to take out a loan against your car and are not sure that you will pay it back in time, it is a risky decision that is unlikely to lead to anything good. 

Second, be sure to consider the length of time you will be paying off your existing debts with your new loan. You may think that your APR is as low as possible, but that is because it will take you 5 to 10 years to repay your debt. That way, you will lower your monthly payments but pay more interest over those years. 

Third, consolidating credit cards should be the last option on your list of possible options to improve your financial situation because it can negatively affect your credit rating. 

Credit card consolidation can be a great financial solution to get rid of debt faster and even improve your credit rating through timely payments if you follow all of these nuances. 

FAQ

Does consolidating hurt my credit score?

Before giving you a new loan, the lender will check your credit history, so your score may drop slightly. In addition, a credit check can be a barrier to borrowing money in the future, but only if you do not pay your new debt on time. In any case, in the long run, and with timely monthly payments, this decision can positively affect your credit score.

Is it a good thing to consolidate my credit cards?

Any solution that helps you pay off your debts faster is financially smart. Combining several loans into one can also be a good solution if the new one has a lower APR and better repayment terms.

What is a consolidation credit card?

This is the process of paying off your debts by getting a new loan. For example, you can take out a personal loan or get a balance transfer card and use it to pay off your current credit card debts. That way, you will have only one loan left, which will be easier to pay off.

Can I consolidate my credit card debt myself?

If you have understood the subject deeply enough and have determined which option is most profitable for you, you can consolidate your credit card debt on your own. The help of professionals in this situation is only necessary to find the best consolidation loan.

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