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How To Consolidate Your Credit Card Debt

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How Debt Consolidation Works

Debt Management Tips : How to Consolidate Credit Card Debt

Debt consolidation occurs when you use a new loan or credit card to pay off existing debt. While the term “consolidate” implies merging multiple credit accounts into one, you can also consolidate a balance from just one credit card.

Consolidating debt works best when you can score a lower interest rate on the new loan or credit card than what you’re currently paying. With a lower rate, you can save money and potentially pay off your debt faster.

If you have multiple debt accounts you want to consolidate, the process can also simplify repayment by giving you just one monthly payment to keep track of. Also, if you have credit cards, which don’t have set repayment terms, a personal loan’s set repayment time frame could give you the structure you need to stick with the payoff plan.

For example, let’s say you have a credit card with a $7,000 balance and a 20% annual percentage rate . If you were to set a goal to pay off the debt over three years, you’d have a monthly payment of roughly $260, and you’d pay $2,365 in interest over that time.

But if you were to apply for a three-year personal loan with a 12% interest rate, your monthly payment would be $233, and you’d pay only $1,370 in interestsaving you $995.

However, debt consolidation isn’t for everyone, so it’s important to consider your situation and options before you apply for a new credit card or consolidation loan.

Automate Your Payments And Pay Your Full Balance Each Month

The largest factor in your credit score is your history of payments: keep them on time and you’ll see your credit score slowly build. By automating your payments, it becomes even simpler to stay on top of your credit card debt.

Once you hit your zero balancewhether through a debt consolidation strategy or just careful debt managementconvert your mentality of credit cards as free-money-you-don’t-yet-have to monthly-debt-that-earns-rewards by paying off your balance in full at the end of each month.

What Is A Debt Consolidation Loan

If you take out a debt consolidation loan, you use the loan to pay off all of your credit card providers, meaning that youll have paid off all your existing credit card debt. Youll then work to pay off the loan in order to get yourself completely debt-free.

Opting for a debt consolidation loan means that youre trading one type of debt for another the benefit of doing this is that debt consolidation loans may have better interest rates than those of multiple credit cards. This allows you to save money on interest payments, and many people find it easier to manage one debt consolidation loan rather than several credit card debts.

Of course, you should always check the terms and conditions of any debt consolidation loan first. Make sure its financially preferable to how you were previously paying off your credit cards, and that any interest on the loan is lower than that of your cards.

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How To Qualify For A Payoff Loan

  • Minimum credit score: 600 borrower average is 710.

  • Minimum credit history: Three years.

  • At least two open accounts on credit report.

  • Minimum monthly free cash flow: $750 borrower average is $2,000.

  • No debt-to-income ratio requirement, but borrower average is 40%.

  • Zero credit delinquencies.

  • Must be able to provide income verification.

  • No bankruptcies filed within the past two years.

  • Must provide Social Security number.

Loan example: A three-year, $20,000 loan with a 20.5% APR would cost $748 in monthly payments. Youd pay $6,928 in total interest on that loan.

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What is the Best Way to Consolidate Credit Card Debt?
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Mozo provides general product information. We don’t consider your personal objectives, financial situation or needs and we aren’t recommending any specific product to you. You should make your own decision after reading the PDS or offer documentation, or seeking independent advice.

While we pride ourselves on covering a wide range of products, we don’t cover every product in the market. If you decide to apply for a product through our website, you will be dealing directly with the provider of that product and not with Mozo.

Polly Fleeting

Polly Fleeting is a personal finance writer here at Mozo, specialising in loans and credit cards. Her work is aimed at helping people find ways to make smart product choices, reduce debt and get more for their hard-earned dollars. Polly has a degree in Journalism from the University of Technology, Sydney. She is also ASIC RG146 certified for general advice.

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Debt Management Plans: Pros And Cons

Pros:

  • Can cut your interest rate by half or more.

  • Helps pay off debt faster than doing it yourself.

  • Consolidates several debts into one payment.

Cons:

  • Is mostly for credit card debt cant be used for student loans, medical debt or tax obligations.

  • Takes three to five years, and youre generally unable to use credit cards or get new lines of credit while on the plan.

  • Missing a payment can derail the plan and end your interest rate cuts.

Make A Monthly Credit Review Date

Planning for the future isn’t exciting, but living in the future with your wealth will be.

Set aside one day a month to pull out your account statements, credit card statements, and credit report and take stock of your accounts. By reviewing your credit report, you make sure that no errors are cheating you out of credit score points. By looking at your accounts, you can detect and document trends that can help you build an updated budget and plan for the future. And when you check out your credit card statements, you can gain insight into how credit cards make money off of you and begin to flip the script to start earning rewards from them instead.

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Best For Homeowners With Fair To Average Credit

Homeowners can use a home equity loan, home equity line of credit or refinance to consolidate their debt. A home equity loan is a second mortgage taken against the equity you’ve accrued in your home that provides a lump sum of cash with a fixed interest rate. A home equity line of credit, or HELOC, is also based on your home’s equity but works more like a credit card, offering you a revolving credit line you can access when needed. You’ll only pay back the amount you take out, plus interest, with a HELOC. And, if you have enough equity in your home, you can use a cash-out refinance to roll your credit card debt into a significantly lower interest rate.

A home equity loan or HELOC can help with debt consolidation, but the risks are higher — if you default on either, you could lose your home to the lender. That said, this can be a good option for homeowners with equity in their home that have the discipline to pay off the loan responsibly, without missing a payment.

Cons Of Personal Loans

How to Consolidate (and OBLITERATE!) Credit Card Debt

At the end of the day, you have to prioritize your financial goals to land on one side or the other. Reading this article is just one of the many steps you can take to make that final decision.

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Can You Afford To Pay Off Your Credit Cards

Consolidating your credit card debt doesn’t eliminate it. Even if the consolidation loan reduces your monthly payment, you still have to pay off all you owe. So, if you don’t have a steady income or can’t afford your monthly payment, consolidating your credit card debt probably won’t help you get back on track.

Warnings To Heed When You Consolidate Credit Card Debt

These are the biggest pitfalls that consumers run into when they consolidate credit card debt.

The biggest mistake people make after consolidating credit card debt is that they dont stop making new credit card charges. If youre trying to pay off debt, you need to focus on elimination. New charges just set you farther back from your goalits like two steps forward, one step back.

A Consolidated Credit client named Carol ran into this problem when she consolidated on her own using a balance transfer credit card. She used the card to consolidate her debt, but she hadnt balanced her budget. As a result, she ran up new balances quickly.

The right way: Before you consolidate, you need to set up a household budget. The goal is to cover all your bills and necessary expenses with income. This helps you avoid relying on your credit cards to cover everyday needs. If you cant cover all your daily expenses without credit, then consolidating your debt has a higher chance of failure.

For consolidation to be effective, you need to reduce or eliminate interest charges applied to your debt. Otherwise, you dont generate the cost savings you need for this to be an effective way to eliminate your balances. This means you need at least a good or excellent to qualify for do-it-yourself debt consolidation at a good, low-interest rate.

The right way: If you owe more than $30,000 or have a bad credit score, consolidating on your own can be tough. You may be better off asking for help.

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Work With A Nonprofit Credit Counseling Organization

can review your entire financial situation and work with you to create a plan to tackle your financial challenges. They give advice about credit issues, budgeting, money management and debt management.

If you work with a credit counselor, its important to research the organization before you get started. Check with your state attorney generals office and consumer protection agency to ensure its reputable.

Pros: A credit counseling organization may work with your to set up a debt-management plan on your behalf, which requires you to make a single monthly payment to the credit counseling organization each month. The organization then uses the money you provide to pay your creditors. Your credit counselor may also work with your creditors to negotiate lower interest rates or waive certain fees.

Cons: Some credit counselors may charge a fee for some of their services, and you may have to agree not to apply for new credit or use your existing credit if you participate in a debt-management plan.

Home Equity Loan Or Line Of Credit

How To Consolidate Credit Card Debt Without Hurting Your ...

Pros:

  • Lower interest rates than personal loans.

  • May not require good credit to qualify.

  • Long repayment period keeps payments lower.

Cons:

  • You need equity in your home to qualify, and a home appraisal is usually required.

  • Secured with your home, which you can lose if you default.

If youre a homeowner, you may be able to take out a loan or line of credit on the equity in your home and use it to pay off your credit cards or other debts.

A home equity loan is a lump-sum loan with a fixed interest rate, while a line of credit works like a credit card with a variable interest rate.

A HELOC often requires interest-only payments during the draw period, which is usually the first 10 years. That means youll need to pay more than the minimum payment due to reduce the principal and make a dent in your overall debt during that time.

Since the loans are secured by your house, youre likely to get a lower rate than what you would find on a personal loan or balance transfer credit card. However, you can also lose your home if you dont keep up with payments.

  • Lower interest rates than unsecured loans.

  • No impact on your credit score.

Cons:

  • It can reduce your retirement fund.

  • Heavy penalty and fees if you can’t repay.

  • If you lose or leave your job, you may have to quickly pay back your loan.

If you have an employer-sponsored retirement account like a 401 plan, its not advisable to take a loan from it, since this can significantly impact your retirement.

Cons:

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What Should I Be Wary Of When Consolidating Debt

Consolidating your debt isnt an easy fix. While its often a smarter way to manage your debt and could help you pay off your debt sooner, you do have be aware of the fine print.

Things to look out for:

  • Check that your new interest rate is lower than what you are currently paying, otherwise you may end up finding yourself in more debt.
  • Dont forget to take the fees and charges into consideration.
  • If you have arranged a balance transfer that has a low rate, or no rate, introductory period, make sure you check what the interest rate is after this period ends and commit to paying off your debt during the intro period.
  • If you are considering a credit card provider that is not well-known, check they are licenced by ASIC.
  • Be cautious when companies offer credit fix, credit repair or debt solution and charge a fee on the assertion they will improve your credit rating. Credit card defaults are automatically marked against your name and cannot be removed unless you prove its incorrect.

Need some help?

If youre feeling overwhelmed and want some help managing your debt, it might be worth talking to a financial counsellor. This is a free service offered by community organisations, community legal centres and some government agencies to help you solve your money problems. For more information, please visit ASICs MoneySmart page.

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Pros And Cons Of Debt Consolidation Options

Debt consolidation is beneficial to some people, but not everyone. It comes in several varieties, each one having plusses that make it appealing and minuses that might make your situation even worse.

Because every persons financial situation is unique, it is best to spend time examining each option and find the one that is right for you. Here is a look at some of the good and bad sides of the seven debt consolidation options.

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Look For Lower Interest Rates

A lower interest rate allows for a higher portion of your payments to go towards paying off the principal of the loan, so you can pay off the debt faster. Here are a few ways to get a lower rate:

  • Request a lowered interest rate from your credit card provider
  • Open a lower interest credit card, and make a balance transfer
  • Move balances off of cards with especially high interest rates, and onto cards that can minimize these charges

Why I Stayed In Debt

Credit Card Debt Information : How to Consolidate Credit Card Bills

A few years ago, I had $8,000 in credit card debt. I knew that I needed to pay it off, but it seemed like an impossible task. I was making only $500 per week at my job how could I ever hope to pay off the full balance?

I stayed in debt because I kept being tempted into putting new charges on the credit card.

I wouldnt be able to pay it off in full at the end of the month anyway, so what was the harm in adding a few more dollars?

After a while, I decided to stop using my plastic and take the first steps toward paying off my thousands of dollars of debt.

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How To Effectively Consolidate Your Credit Card Debt In Canada

Do you know that at present time, there are more credit cards than there are people in Canada? TransUnions study says that 43 million credit cards are active in Canada and we only have a population of about 35 million. This means that the majority of people have credit card debt and multiple credit card debts mean a lot of money spent on paying for interest.

Additionally, the TransUnion study says that the average Canadian have an average of $4,094 in credit card debt with one or a few credit cards. It certainly looks like the average Canadian will benefit from consolidating credit card debt.

Approvals Are Harder To Come By

While the Federal Reserve wants to encourage borrowing in a down economy, lenders want to limit their risk. This means that they only want to extend loans to people that are likely to pay them back. Theyre understandably worried about defaults if people cant pay.

As a result, they tighten lending standards. This means you need a higher credit score and a lower debt-to-income ratio to qualify for new credit. This means that its currently tougher to qualify for debt consolidation loans and balance transfer credit cards.

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Consolidating Credit Card Debt Could Help Simplify And Lower Your Monthly Payments As You Work To Become Debt

Consolidating credit card debt is when you combine multiple credit card balances into a single monthly payment that ideally has a lower interest rate than what youre currently paying.

But consolidating your debt takes time, and many methods require an application process to see whether youre approved first, which usually results in a hard credit inquiry that can cause your credit scores to drop a few points.

To help you decide if credit card consolidation is right for you, here are several methods to consider.

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