Consolidation Can Help Your Finances
Researching the ways you can consolidate your credit card debt without having a negative impact on your credit is smart, and you may be able to get all of the perks of consolidation without a hit to your credit.
Be sure to remember these two things:
- You want a consolidation loan with the most affordable interest rate possible
- You want payments you can easily make so theres no risk of delinquency.
If you can do those things, and pay off your credit card loan consolidation on time, youll be well on your way to becoming debt free with a healthy credit score. If you arent sure youll be able to commit to paying your credit cards off using this strategy, it may be worthwhile to consider working with a debt consolidation company to help guide you through the process.
- One-on-one evaluation with a debt counseling expert
- For people with $10,000 in unsecured debts and up
Pay Off Your Consolidation Loan On Time
It’s crucial to pay off your consolidation loans on time. Payment history accounts for 35% of your FICO score, and its one of the two most important credit scores you have. Your VantageScore is the other, and payment history is also an important factor in determining your VantageScore.
Most lenders use your FICO or VantageScore when assessing your credit, or have a similar scoring model that also focuses heavily on payment history.
If you pay off your consolidation loan on time, you will develop a positive payment history so your score should go up because of it. You’ll also reduce your utilization ratio with each payment you make, which gives your score a further boost.
Can I Use Debt Consolidation Without Closing Credit Cards
Yes, although it depends on your situation. If you have good credit and a limited amount of debt, you probably wont need to close your existing accounts. You can use a balance transfer or even a debt consolidation loan without this restriction.
Getting a balance transfer credit card never comes with restrictions. If you get approved for the card, the creditor will not require you to close your other cards. And even with a debt consolidation loan, you may only face an account closure restriction in some cases.
Do you have a question about debt consolidation? Just ask our certified credit coaches!
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A Certified Credit Counselor will be calling you at the number you provided. Theyll complete your free debt and budget analysis, then discuss the best options for getting out of debt with you. If a debt management program is right for you, your counselor can also help you enroll immediately.
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Use A Balance Transfer Credit Card
A balance transfer lets you move balances from one or more credit card accounts to a different card. Balance transfer credit cards often offer an introductory 0% APR on balances you transfer within a certain amount of time.
Pros: If you pay off the balances you transfer before the introductory period expires, you could avoid paying interest charges on the transferred balance altogether.
Cons: The promotional period is limited. If you dont pay off the amount you transfer before the intro period ends, the remaining balance will accrue interest at the cards regular rate.
In addition, some cards charge a balance transfer fee, which will add to the debt you must repay. Also, the amount you transfer including any fees charged cant be higher than your , which may not be high enough for you to pay off all your debt.
Keep in mind that you may not be allowed to transfer balances between cards issued by the same lender. And if you opt for a balance transfer, its especially important to pay on time because late payments may cancel the introductory APR offer.
How To Consolidate Credit Card Debt With A Personal Loan
Using a loan to consolidate credit card balances is another DIY option you can use if you have good credit. You take out a loan the lowest interest rate possible and use the funds you receive to pay off your credit cards. This leaves only the loan to repay.
This is often the best way to consolidate credit card debt if you want lower monthly payments. Depending on the term you choose, you can significantly reduce how much you pay each month. But you still get out of debt faster than you would with traditional payments thanks to the low APR.
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Credit Card Consolidation Loan
Fixed interest rate means your monthly payment wont change.
Low APRs for good to excellent credit.
Direct payment to creditors offered by some lenders.
Hard to get a low rate with bad credit.
Some loans carry an origination fee.
You can use an unsecured personal loan from a credit union, bank or online lender to consolidate credit card or other types of debt. Ideally, the loan will give you a lower APR on your debt.
are not-for-profit lenders that may offer their members more flexible loan terms and lower rates than online lenders, especially for borrowers with fair or bad credit . The maximum APR charged at federal credit unions is 18%.
Bank loans provide competitive APRs for good-credit borrowers, and benefits for existing bank customers may include larger loan amounts and rate discounts.
Most online lenders let you pre-qualify for a without affecting your credit score, though this feature is less common among banks and credit unions. Pre-qualifying gives you a preview of the rate, loan amount and term you may get once you formally apply.
Look for lenders that offer special features for debt consolidation. Some lenders, like Payoff, specialize in consolidating credit card debt. Others, like Discover, will send loan funds directly to your creditors, simplifying the process.
Not sure if a personal loan is the right choice? Use our debt consolidation calculator to enter all of your debts in one place, see typical rates from lenders and calculate savings.
Consolidated Credit Helps Canadians Consolidate
Since 2007, Consolidated Credit has provided education and free credit counselling to over half a million Canadians. Some went on to enroll in a debt management plan to consolidate credit card debt and other unsecured debts. In 14 years, weve helped our clients consolidate over $500 million in debt.
This map shows the total debt we consolidated in 2020 and the average debt amount consolidated in each province and territory.
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Can Debt Consolidation Affect Your Credit Score
Debt consolidation has the potential to help or hurt your credit scoredepending on which method you use and how diligent you are with your repayment plan.
The strategy is considered in situations where people want to streamline the repayment of multiple high-interest debt amountsoften with the hopes of saving money and lowering their debt burden. Debt consolidation is typically used by people who have mounting debt and want to reduce the number of lenders they have to pay each month.
While eliminating or lowering your debt may help your credit score over time, debt consolidation is not typically used as a strategy to increase your credit score. It is used as a method of reducing or eliminating debt.
Where To Go For Help If You Need It
You may need help from a professional agency if you cant qualify for traditional options because you have poor credit or few assets. Getting advice from a nonprofit can help you sort through your options and chart the best course of action.
While you may see debt settlement companies advertised as a debt solution, working with these types of companies is a less desirable option because they often charge fees and use methods that harm your credit scores. You can negotiate a settlement with the credit card company on your own, without paying fees to a third-party company.
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Things To Watch Out For When You Consolidate
Using credit card consolidation to become debt-free takes the right strategy and discipline. You need to make sure that its the right fit for your situation and then follow through. Heeding these warnings can help you make sure that credit consolidation will be a successful solution for you. Always consider your financial situation carefully before you consolidate. If youre not sure if consolidation is right for you, call to receive a free evaluation from a certified credit counselor.
Pros Of Debt Consolidation Loans
- Interest should be lower than what was being paid for credit card debt.
- Combines several bill payments into one monthly payment.
- Payments are the same amount every month and are for a fixed amount of time, usually 3 to 5 years.
- They dont require as high a credit score as balance transfer cards do.
- They can decrease the credit utilization ratio.
- They are unsecured, unlike a home equity or other collateral-based loans.
- Some come with special offers, like direct payment to creditors, free credit score monitoring, hardship flexibility and more.
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Heres Why You Would Want To
- You have more than one car payment with different due dates and want the relief of having one payment to keep track of
- Your current interest rate is high and you may be able to lower it
- Your current monthly payment is high and you may be able to lower it
- Your credit score could use a boost
What Is The Statute Of Limitations On Credit Card Debt
The statute of limitations is a law that governs how long a creditor can sue you for non-payment on a debt. You can check this by requesting a debt verification or validation letter by calling, faxing, or mailing a letter to your creditor. The statute of limitations on credit card debt varies from state to state, but is typically between three and 10 years.
Even if your debt is past the statute of limitations, it may still be within the credit reporting time limit.
The statute of limitations begins to calculate from the last moment the debt was active, so its important to make sure that when you call your creditor, you avoid agreeing to any sort of payment plan until you can confirm the statute of limitations on your debt.
Even if your debt is past the statute of limitations, it may still be within the credit reporting time limit. This is the amount of time credit bureaus can report delinquent account information to your credit report. In most cases, the credit reporting time limit for negative information is seven years.
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Consider A Debt Management Plan
If you’re having trouble finding a balance transfer credit card, personal loan or home equity option at a favorable rate, consider contacting a nonprofit credit counseling agency that can help you set up a debt management plan.
A credit counselor can analyze your situation to help you find the right path. If you choose to get on a debt management plan, you’ll make one monthly payment to the agency, and it’ll pay your creditors on your behalf. Credit counselors can sometimes even negotiate lower interest rates, debt forgiveness or lower monthly payments for you.
You may have to pay a small service or monthly fee, and debt management plans typically last three to five years. Also, you may be required to close the credit accounts that you are consolidating, which could hurt your credit scores. Be sure to ask for all the terms, and keep these potential drawbacks in mind as you compare options.
To find a reputable credit counseling agency, make sure it is accredited by the National Foundation for Credit Counseling.
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.
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Consolidate With A Balance Transfer Credit Card
This consolidation method moves your credit card balance from one or more credit cards to a single balance transfer card. This option is also called . Most balance transfer cards offer a 0% APR introductory period, often 12-18 months. Do the math to ensure the interest you save over time will be worth the cost of the fee and make a plan to pay off the credit debt before the end of the interest-free promotional period.
- 0% APR introductory period, often 12-18 months
- May charge an initial fee of 3-5% of the amount transferred
- Some cards charge an annual fee
- The lender may check your credit with a hard inquiry, which may hurt your credit score
Using Home Equity To Consolidate Debt
Several other financial products can be used to consolidate debt if someone owns a home. These mortgage products borrow against the equity a homeowner has available in the home. Home equity is the current market value of a home minus the remaining balance on the mortgage.
In most cases, a homeowner can borrow against up to 80 percent of the equity available on the home. That equity can be used for a variety of purposes, including paying off existing debt.
These mortgage products can be used for debt consolidation:
- Home equity line of credit
- Home equity loan
- Second mortgage
- Reverse mortgage
Its important to note that borrowing against equity can be risky, particularly if you are already facing financial challenges. Home equity products are secured debt that uses your home as collateral. If you fall behind on the payments, you may face foreclosure.
Whats more, borrowing against equity decreases your net worth. You turn an asset into a liability, which are the two measures used to assess insolvency. In other words, if your bet against your equity doesnt pay off, it may move you one step closer to bankruptcy.
If you are a homeowner who is considering borrowing against your equity, think carefully and always consult with a qualified mortgage professional. However, for this guide, we will focus on the other unsecured methods of consolidating debt.
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Does A Debt Consolidation Loan Require You To Close Your Credit Cards
You may also run into account closures with some lenders if you apply for a debt consolidation loan. When you apply for a loan, the lender considers your debt-to-income ratio. That ratio measures total monthly debt payments versus total monthly income. Your ratio must be 41% or less to qualify for any loan. With a debt consolidation loan, they factor in the new loan payments and factor out your credit cards.
In many cases, the lender will simply approve or reject your application based on your DTI. However, if your DTI is high, some lenders may accept your loan application but only with caveats. They may require that you close all your accounts in order to secure the loan. That way, they have some assurance that you wont just run up new balances.
This is more common with smaller lenders, such as local banks or credit unions. Credit unions, in particular, work to help members. So, if a member is having trouble with debt, they might recommend closing the cards. Its also more likely to happen if youve consolidated your debt with a consolidation loan more than once.
So, make sure when youre asking for quotes to ask if the lender places any restrictions on borrowers. This may help you avoid this situation.
Opt For A Secured Loan
There are times when premade debt consolidation programs cant accommodate your preferred repayment plan or cover vehicle and home equity loans. In turn, you may want to take things into your own hands by creating a program for yourself.
One way you can do so is by taking a secured loan, which requires you to provide collateral equal to the amount youre borrowing. Its much easier to get approved for a secured loan, even with bad credit, as the lender gets financial protection from your collateral. Likewise, youll lose the collateral if you cant make the repayments on time.
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