Explore Your Options For Credit Card Debt Relief
Credit card debt consolidation is just one way to manage credit card debt. To decide whether itâs right for you, it may help to examine other . Learning ways to cut expenses may also be helpful.
If paying your credit card bills is a struggle, consolidating credit card debt may offer a way to help you get back on track. But if you think you may miss or have already missed a credit card payment, the CFPB recommends reaching out to your credit card company as soon as you think you need help. Your credit card company may be able to work with you to keep you on track or help you get back on track.
Government and private relief efforts vary by location and may have changed since this article was published. Consult a financial adviser or the relevant government agencies and private lenders for the most current information.
We hope you found this helpful. Our content is not intended to provide legal, investment or financial advice or to indicate that a particular Capital One product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.
Objective Debt Consolidation Advice
When youre going through financial difficulty there are a lot of options to consider. So it can be super helpful to sit down with an knowledgeable, non-profit credit counsellor who can objectively review all your debt consolidation options with you, give you the right advice and guidance, and help you make a plan to resolve your difficulties. Once you can see your way out, you can regain your peace of mind and follow your plan forward with confidence.
Get Some Help Its Free
Get a free appointment to explore your options and get back on track.
How Does Credit Card Debt Consolidation Work
- lowering the interest rate on your debt
- reducing what you owe in interest each month
Consolidating credit card debt also comes with some costs. You’re likely to pay fees on an initial or an ongoing basis, depending on what you choose. You might also discover that consolidating debt via a balance transfer card or consolidation loan doesn’t greatly reduce your interest rate, so you will have to weigh the benefits of bringing your debts to one bill versus the trouble of managing them separately.
You May Like: Td Bank Gift Card Online Purchase
How Credit Card Debt Consolidation Can Improve Your Credit:
- Reducing your overall debt by consolidating it and paying it off is obviously a huge benefit for your credit score. Not only does it reduce the amount you owe, versus the amount of credit extended to you , consistently paying off the debt will have built you a positive payment history. Reducing your utilization rate and making consistent payments can lead to improvements to your credit score.
- Debt consolidation means your old credit cards now have a zero balance, and a great individual utilization rate. If you keep these accounts open their zero % utilization rate may improve your credit score.
- Debt consolidation can stop your unpaid balance from growing as quickly, so you can get a handle on what you owe, and stop your credit score from worsening.
When A Personal Loan Is The Best Option
A personal loan is among the best debt consolidation options when it comes with a low enough interest rate and affordable monthly payment. It should show significant savings compared to what you were paying on your credit cards. For example, if you have $10,000 in credit card debt at 23.99% interest, and you qualify for a personal loan at 10% interest, you will save $1,399 a year, or more than $100 a month, in interest. If the payment on a personal loan is higher than you can afford, you can ask for a longer repayment period to bring it down, but keep in mind this means paying more in the long run because of interest on those payments.
Also Check: Fortiva Pre Qualify
Tips For Successful Credit Card Debt Consolidation
All in all, the keys to successful credit card consolidation are fairly basic. You need to obtain a lower APR than youre currently being charged, and youll likely need a single place to put all of the balances you need to consolidate. So, the first step is to lay out your credit card debts and look at how much you owe and what youre being charged for it.
With a list of your credit card debts in front of you, you can determine how much you owe and what your target APR should be to save money on interest fees. Then, its simply a matter of finding the credit card or loan that meets your needs.
For example, consider Cindy, who has three credit cards with balances she would like to consolidate, which have the APRs and balances shown in the chart above. The total amount of credit card debt that Cindy needs to consolidate is $7,575, and the lowest APR charged by any of her target credit cards is 16.99%.
Based on her situation, if Cindy chooses to use a consolidation loan, shell need to take on a loan for $7,575. If she chooses to use a balance transfer offer, Cindy will need to qualify for a credit line equal to $7,575, plus any balance transfer fees, which, if charged, will likely range from $227.25 to $378.75 .
Consolidating Credit Card Debt Through A Debt Management Program
If you cant consolidate credit card debt on your owneither because you have a low credit score or too much debt for a DIY solutionthen you need to call in professionals.
Not sure which consolidation option is right for you? Talk to a certified credit counselor for a free, no-obligation debt evaluation.
Also Check: Is It Better To Pay Credit Card In Full
Examples Of Debt Consolidation
Say you have three credit cards and owe a total of $20,000 at a 22.99% annual rate compounded monthly. You would need to pay $1,047.37 a month for 24 months to bring the balances down to zero. This works out to $5,136.88 paid in interest alone over time.
If you consolidated those credit cards into a lower-interest loan at an 11% annual rate compounded monthly, you would need to pay $932.16 a month for 24 months to bring the balance to zero. This works out to paying $2,371.84 in interest. The monthly savings would be $115.21, and a savings of $2,765.04 over the life of the loan.
Even if the monthly payment stays the same, you can still come out ahead by streamlining your loans. Say you have three credit cards that charge a 28% annual percentage rate . Your cards are maxed out at $5,000 each and you’re spending $250 a month on each card’s minimum payment. If you were to pay off each credit card separately, you would spend $750 each month for 28 months and you would end up paying a total of around $5,441.73 in interest.
|Consolidating three credit cards into one low-interest loan|
Does The Downturn Affect Consolidation With A Debt Management Plan
The good news is that the limitations that you see with do-it-yourself debt consolidation dont affect people who want to consolidate with a debt management plan, Herman says. There are never any credit score or debt-to-income ratio requirements you must meet to enroll in a debt management program. You can use the program regardless of how low your credit score is or how much debt you need to consolidate.
This means that people who want to consolidate still have a way to do so even if they cant qualify for the do-it-yourself options.
Credit card companies want to work with people, Herman encourages. Working with a credit counseling organization like Consolidated Credit shows them that youre serious about pay back everything you charged on your credit cards. So, we can work with them to reduce or eliminate the interest charges applied to your balance and find a monthly payment that you can afford. Its a great way to consolidate for those who cant successfully consolidate on their own.
Signs You Should Consolidate Debt
- You are spending more money than you are making.
- Your credit card balances are growing, not shrinking.
- Youre paying only the minimum payments on your debt
- You have been turned down for a credit card or store installment loan for having a high debt-to-income ratio.
- You carry debt on more than 5 credit cards.
- You are approaching or are at your credit card limits.
- You carry a balance on credit cards with interest rates in excess of 18.99%.
What Is Debt Consolidation
Debt consolidation is the process of combining two or more debts into a single larger debt. This step is often taken by consumers who are burdened with a significant amount of high-interest debt.
Its often used to combine credit card debts, auto loans, student loans, medical debt or other types of loans into a new loan, says Katie Ross, executive vice president of the nonprofit American Consumer Credit Counseling. Then the borrower only has to pay one monthly payment instead of a separate payment for each debt.
In addition to simplifying your finances, debt consolidation ideally gives the borrower more favorable loan terms, such as a more competitive interest rate.
Also Check: Cabelas Visa Club Points
Borrow Against Your Home Equity Or Retirement Savings
Loans taken out against your home or retirement account are secured by real assets.
Benefits of home equity or retirement loans
- Because they’re secured, these home equity or retirement loans typically have very competitive interest rates and often also allow for higher loan limits.
- Home equity loans and retirement fund loans can have longer repayment periods than personal loans, giving you more timeand therefore lower monthly paymentsto tackle your debt.
Drawbacks of home equity or retirement loans
- Home equity or retirement loans often come with origination fees.
- There may be restrictions on how retirement loans can be used, so be sure to read the conditions associated with your retirement loan.
- If you fail to repay a retirement loan, you will be charged hefty penalties that will reduce the value of your nest egg.
- If not paid on time, you may have to pay tax on the interest on your retirement loan.
- If you fail to repay a home equity loan, you could lose your home.
How Credit Card Debt Consolidation Can Hurt Your Credit:
- Opening new balance transfer cards or taking out loans will result in hard inquiries being placed on your credit report. New account activity may account for a small percentage of your credit score.
- New accounts through a debt consolidation loan or balance transfer credit card will also lower your average account age. An account with a long and positive history can contribute favorably to your overall score.
Also Check: Cabela’s Club Visa Apr
Does Consolidating Debt Hurt My Credit
Lets face it, if youre looking into a debt consolidation, chances are your credit has already taken more hits than Rocky Balboa. But like Rocky, you can come out a winner. How? Why, with a Debt Consolidation Program, of course!
A Debt Consolidation Program, when followed and completed successfully, will actually improve your credit in the long-run by properly addressing your debt. Plus, once you’re completely debt-free your counsellor will put you on the fast track to rebuilding your credit.
Some of the blows delivered to your credit report are likely due to the following 3 factors. Here they areand heres how a Debt Consolidation Program can help.
Many individuals seeking debt relief have accounts in collections or accounts with missed or late payments. With a Debt Consolidation Program, you only have to make one payment per month to pay all your creditors, making it easier to manage and less likely to be missed.
This is your available credit versus the credit youve used. To maintain a good score, this figure should be at or below 30 percent however, most people in debt-distress are already over, at, or near their limits. Luckily for you, once you’re on a Debt Consolidation Program you stop using credit , so you automatically stop causing more damage.
Shop For Cards That Your Better Credit Deserves
Find a credit card with a lower APR or a rewards program that matches your hobbies and cut up your paid-off, high-APR cards. With the higher credit scores that come with debt repayment, you’ll begin to earn approval for rewards cards that offer either cash back, travel discounts, or gifts. The true sign of great credit is when you spend less than what you earn.
You May Like: Td Bank Visa Gift Card
Which Debts Can Be Consolidated
A debt consolidation loan is primarily used to pay off credit card debt, but could also be used for the following debts:
Debt management plans primarily consolidate credit card debt, which happens to be the most common reason to consolidate debt. But you can also add past due utilities, collection accounts, payday loans and medical debt for payment convenience. In other words, there isnt a reduction in interest rates, but it can simplify and consolidate your bills.
One thing to consider is that medical debt and utility bills dont have interest rates attached to them. It might not be wise to use money from a loan to pay off a debt that does not accrue interest. DMPs however, can pay the bills for you without having those debts accumulate interest.
Secured debts such as homes, property and automobiles can be refinanced, but are not considered good candidates for debt consolidation.
When Borrowing From A Life Insurance Policy Is The Best Option
Borrowing from a life insurance policy could be a good debt consolidation option if the policy has significant cash value, and if you or your family would not be financially devastated by losing the death benefit. This option may be preferable to bankruptcy, if none of the other options detailed are feasible.
The Most Important Factor In Debt Consolidation Loans
While debt-consolidation loans make budgeting easier, the most important factor to consider when opening one is the interest rate. Americans average $6,194 in credit card debt, and the average APR is about 16.61%. Assuming you were to only make the minimum payment each month , it would take you more than 17 years to pay off this balance, and you’d pay an estimated $7,286 in interested fees.
Meanwhile, with the flexibility of peer-to-peer lending platforms, you can score a debt-consolidation loan with APRs as low as 4%, give or take with the prime rate. The current average APR for personal loans according to the Fed is 9.63%.
For example, say you have $10,000 worth of credit card debt with a 16.61% APR. If you paid it off in three years, you would pay a total of $2,656.53 in interest, according to Experian’s APR calculator. Meanwhile, if you took out a personal loan with 9.63% APR, you would pay $1,447.90 in interest. This is a potential savings of $1,208.63 you’d nearly cut your interest payments in half.
Before applying for any kind of personal loan, you should see what APR you prequalify for using the loan company’s website. This can usually be done by inputting your social security number, date of birth, annual income, employment status and contact information.
While it’s not a guarantee, this will give you an idea of what rates you qualify for. If the lender offers you the same APR, or a higher rate, on the loan as your credit cards, you should not consolidate.
Debt Consolidation And Credit Scores
A consolidation loan may help your down the road. Paying off the loan’s principal portion sooner can keep interest payments low, which means less money out of your pocket. This, in turn, can help boost your credit score, making you more attractive to future creditors.
At the same time, rolling over existing loans into a brand new one may initially have a negative impact on your credit score. That’s because credit scores favor longer-standing debts with longer, more-consistent payment histories.
Also, closing out old credit accounts and opening a single new one may reduce the total amount of credit available, raising your debt-to-credit utilization ratio.
Don’t Miss: Fortiva Mastercard Reviews