How Does Debt Consolidation Work
Debt consolidation is the process of taking multiple loans and refinancing them into one loan with a new lender. There are multiple ways to consolidate your loans. The most popular way is to take out a personal loan and use those proceeds to pay off your other debts, but some consumers prefer to use home equity loans or HELOCs.
No matter which type of loan you choose, the process is largely the same. Youll start by comparing interest rates among a few lenders to see which one offers you the best deal, and youll apply for enough money to cover your existing debts. Once you receive your loan funds, youll pay off your debt and begin making payments on your new loan.
Check Your Credit Report To Confirm The Cancellation
Then sit tight. Getting the card canceled may take a month or more. After that time, take a look at a copy of your credit report to make sure the account is marked as closed.
You can pull a free copy of your credit report once a year from each of the top three credit bureaus at AnnualCreditReport.com.
If the account appears open, repeat the process: Call the customer service number to report the mistake, follow up with a letter by certified mail and then check your credit report again.
If that fails, you can file a dispute through one of the three credit bureaus . And if that doesnt work, you can file a dispute with the Consumer Financial Protection Bureau.
Settling Credit Cards Vs Paying Off Closed Accounts
If your credit card debt is financially overwhelming, and the prospect of paying it all off seems impossible, negotiating with your credit card company for a lower balance is probably an attractive option. Should your credit card company agree, it will settle your outstanding debt for less than you owe. While debt settlement is a lifesaver for some distressed debtors, it almost always has a negative effect on your credit rating.
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Average Age Of Accounts
Anytime you open a new credit account, it reduces the average age of all of your credit accounts. This figure is used to help determine your length of credit historythe others are how long you’ve been managing credit in general and when you last used credit.
According to FICO, your length of credit history makes up 15% of your credit score. But if your credit history is strong in other areas or you have many old accounts, the impact to your credit score from opening a new account may be insignificant.
Know Your Budget: Track Your Income And Bills
Next, collect recent pay-stubs to understand your typical monthly income .
Now, on the debt side, add to your list of credit card balances a collection of your recent monthly and annual bills. That’ll likely include things like:
- Rent, mortgage and other housing costs
- Utilities, like water, gas, heating and electricity, broken down by average monthly balances.
- Loans and insurance: Car loan and insurance, student debt payments and other personal loan or insurance costs
- Subscription service payment
- Grocery and commuting bills
- Education and child-care costs
- And anything else that’s a regular monthly payment, like gym memberships and public transport costs.
You can also load this information into an online budgeting tool, such as Chase’s Budget Builder, to keep on hand for future reference. There are also plenty of budget apps online that are free and easy to use.
Once you have all of this, you’ll have a clearer understanding of your total expenses and income, and how much credit card debt adds to monthly costs.
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Ways To Get Out Of Credit Card Debt
There are several ways to go about it and there is no right or wrong, as long as you are able to get out of debt.
The success of any of these strategies depends on your circumstances and your personality. One method might not work for everybody, so choose wisely.
Here are 5 proven strategies to get out of credit card debt:
Do A Budget And Reduce Your Outgoings
A household budget is a plan that summarises your earnings and spending habits, so you have a clear idea of where your cash is going and where you can make changes to reduce outgoings and boost the money you have to pay down your debt.
If you stick to it, a budget plan will help you make sure you dont fritter away more than you earn and potentially help you work your way out of debt.
Find out more: follow our step-by-step plan to working out an effective household budget.
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Be Persistent And Document Everything
If you want to negotiate with a credit card company, the process usually begins with a phone call. However, it may require long conversations with multiple people over days or weeks.
Before you call, make sure you know exactly how much you owe, what your interest rate is, and any other important account details.
Ordinarily, you’ll need to explain that you’re hoping to work out a credit card debt negotiation so that you can make sure the credit card company gets some of its money back, even if it’s not the full amount, which is better than nothing. If you’re considering filing for bankruptcy, then also let the company know that and tell them that you’d rather negotiate your debt repayment instead.
Don’t give up if the first discussion doesn’t go the way you’d like it to go. These negotiations often happen over time. Be sure to document the details of every conversation you have and who you’re having it with.
If you do strike a deal, then be sure to get the terms of the settlement in writing to avoid future headaches and protect yourself.
As an alternative to pursuing a debt settlement with your credit card issuers, you could speak to a nonprofit organization. These offer certified counselors trained in consumer credit, money and debt management, and budgeting. They help individuals create personalized plans to solve their debt problems and offer solid financial planning advice.
Get An Authorised Overdraft
If you think you’re likely to go into an overdraft, or to exceed your existing overdraft limit, speak to your bank as soon as possible, as it might be willing to increase your authorised overdraft.
Going into an unauthorised overdraft will trigger a whole host of extra charges and can be even more expensive than a payday loan.
Find out more: best bank accounts for authorised overdrafts the accounts we recommend.
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What To Do If Your Debt Is Ruining Your Credit Score
If your high credit card balance is impacting your score, you’ll want to take steps to pay it off as soon as possible.
The fastest option is to make higher-than-minimum payments until you’ve completely paid off your full balance. You’ll continue to pay interest, but depending on how much you can afford to pay each month, you could tackle it before the interest charges get too out of control. But not everyone can afford to go this route.
If the balance is so high that you can’t make a considerable dent, and you’re spending a lot of money on high interest charges, you might want to consider transferring that debt to a personal loan with a lower APR. While applying for a debt consolidation loan will result in a small ding to your credit score , drastically lowering your CUR will more than likely result in a noticeable boost to your credit score.
After applying and getting approved for a debt consolidation loan, many lenders will pay off your creditors directly. Then you repay the loan in monthly installments, usually with a lower, fixed interest rate than you were paying on your credit cards. Once a personal loan is paid off, the credit line is closed and you have no more access to it.
Before you make any decisions, use a free credit score simulator such as the one provided by to see that happens if you were to take out a new loan and pay off your credit card balance.
Take Care Of Your Mental Health
Approximately one in four people in the UK will experience a mental health problem each year and worrying about debt or money can exacerbate the problem.
The good news is there are steps you can take to improve the situation youre in, even if you currently feel unable to take even the tiniest of steps.
Find out more: mental health charity Mind has a wealth of useful information, and a supportive Side by Side community.
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Need To Find Ways To Pay Off Debt
When you owe a lot of money, youre likely to hear from companies offering lots of ways to pay off debt. Credit card companies will suggest getting rid of credit card debt by transferring balances. Banks may offer you home equity loans, and debt settlement companies will offer to help reduce your debt for a fee. But as you consider these ways to pay off debt, its important to understand the true cost. Many common ways to pay off debt involve higher interest rates, larger fees, additional debt, or a negative impact on your credit score.
To find better ways to pay off debt, consider the services available from American Consumer Credit Counseling , a nonprofit agency dedicated to free credit counseling, affordable debt management, and showing people how to get rid of debt without ruining their credit score.
Reduce Your Council Tax Payments
If youre paying council tax you may be able to reduce how much you pay.
For example, if youre living alone, disabled or on a low income, theres a host of council tax discounts available to you.
You can also appeal your council tax if you believe the bill is wrong, or believe that your home has been placed in the wrong council tax band.
Find out more: claiming refunds and challenging your tax band.
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How Do I Pay Off Debt With Debt Settlement
Debt settlement is another option you can consider when youre ready to eliminate your credit card debt. This strategy usually works best for people who are already past-due on their credit card payments and can afford to make large, one-time settlement payments to their creditors.
You can settle debts on your own or you can hire a professional debt settlement company to handle the process for you. If you choose to hire an outside party, you should do extensive research to avoid scammers and exorbitant fees. Be aware that hiring a company to do this is not necessary, and could end up costing you a lot more money. Learn what to watch out for at the FTC Consumer Information website.
- Step 1: Examine your debts, and determine your ability to repay them over time.
- Step 2: If you think your debts are insurmountable, and youve decided bankruptcy isnt the right response, you can either attempt debt settlement yourself or hire a company. The worse your situation the more leverage you might have, because your creditors will see that theyre less likely to be paid in full.
If you go the DIY route:
Or, if you prefer to work with a debt settlement company:
This option usually only becomes available after its become clear that youve been struggling to pay your bills, like if youve started to accrue late payments or havent been paying at all.
Secondly Cut The Costs Of All Your Debt
The aim is simple: repay the debt as quickly as possible, while being charged the lowest possible interest rate.
- Check credit reference files for free. Before you start, it’s worth ensuring your ability to get new cheap credit isn’t being hampered by duff data on your credit files. This can cause rejections, but worse still, if you keep applying before it’s corrected, even once the problem is fixed you can then be rejected because of all the applications. It’s possible to check your for free though.
- Shifts debts to a cheaper credit card. Suitable for: mid to high credit scorers. Used correctly and with discipline, credit cards are the cheapest borrowing possible, especially when shifting debt to new ‘balance transfer’ offers. It’s possible to get long-term balance transfer borrowing on a credit card for 0%. Even if you don’t have a great credit score there are still attainable deals. If you’ve received a letter asking you to pay more on your credit card, see our Persistent Debt guide for specific help.
- Cut credit card costs without new credit. Suitable for: low-mid to high credit scorers. New credit isn’t always necessary to cut credit card costs. Many credit cards allow existing customers to move other debts to them at special rates. Doing this in the correct order can create substantial savings. One MoneySaver told us that by using this technique, he cut his annual interest from £1,400 to £400 a year. See for full info.
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Handling Debt Negotiation On Your Own
When it comes to credit card debt negotiation, the CFPB says that the first thing you need to think about is why you are in debt. Is it a temporary job loss or long-term issue? Understanding how long you might be in this situation can be helpful when you call your creditors to negotiate.
During the height of the pandemic last year, many credit card companies offered deferment. Deferment allows you to temporarily stop making payments for a set period. Some creditors even allowed customers to extend deferment between 3-6 months.
Now, however, creditors are becoming less flexible with customers. But it still may be possible to negotiate for an extra deferment period or to extend your current deferment agreement.
Mistake: Signing Up For A Debt
It is rare to get a quick-fix solution to debt problems. If that is one of the promises you hear, start looking elsewhere. Remedy: The first thing to understand is that debt-relief programs typically take 3-5 years, so be patient. Second, check up on the whatever company you choose for debt relief. The Better Business Bureau or local state attorneys office are good places to start. Credit unions, universities andmilitary bases should be reliable sources for recommendations. Be sure whatever organization you choose is licensed and doesnt have a record of consumer complaints.
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Options For Dealing With Debt
This page tells you about the options you may have for dealing with your debts.
Your options will depend on what money you have to pay off your debts. For information on how to work out if you have enough money to pay off your debts see How to sort out your budget.
If you dont think you owe money that you are being asked to pay OR someone you think you owe money to hasnt been in touch for some time, get some advice from an experienced money adviser. There are quite a few reasons why you might not be liable for a debt and an adviser can go over this with you.
Ask For Lower Interest Rates
Sometimes credit card companies might lower your interest percentage one or two points. This can add to up to hundreds when you do the math. Call each credit card issuer and ask about lowering your rate. If you have been a long term customer that has been making payments on time and have a good credit score, they will more than likely say yes. If you have recently been offered a lower interest rate by a competitor you can ask if they will match it. Depending on the credit card company they might match that offer.
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Debt Consolidation: How To Consolidate Credit Card Debt Without Hurting Your Credit
November 29, 2016 by Adam Tijerina
Debt consolidation, like all the other debt relief strategies, will have an effect on your finances. No matter what you choose, going through the process of paying off debt will change your financial position forever. Lets talk about how to consolidate credit card debt without hurting your credit score.
One of the things that can be affected is your credit score. Most of the debt relief options can shake your credit ratings from where it currently stands. This is why it is very important that you understand the debt solution that you will choose to solve your credit issues. If you choose the wrong strategy, you could end up wasting your time, money, and effort as you get out of debt.
Admittedly, getting out of a high credit balance is hard to do. It is also not something that you can accomplish overnight. Unless you won the lottery or someone gave you a huge cash gift, it is next to impossible to get rid of debt overnight. You have to accept that paying off your credit card debt completely will take at least a couple of months to finish. The higher the balance, the longer it will take for you to be completely free of debt.
So if you are thinking about consolidating your multiple credit card debts, you need to consider a couple of things first.
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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