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Is It Bad To Consolidate Credit Card Debt

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Definitive Guide To Consolidate Credit Card Debt With Bad Credit

Is It A Good Idea To Consolidate Credit Card Debt
  • Nathaniel Altman

    In this article, we have compiled four tips to help you consolidate your credit card debt with bad credit.

    When debts are mounting, debt consolidation can make repaying debt easier, with only one periodic payment, one set of fees, and one interest rate to pay.

    If chosen wisely, this can also save you money and help you regain control over your finances along the way.

    Save Money As You Get Out Of Debt

    One of the primary goals of debt consolidation is to lower the interest rate applied to your debt. Doing so minimizes the accrued monthly interest charges applied to your balance. As a result, you save money overall.

    For example, lets say you owe $10,000 on your credit cards at an average APR of 20 percent.

    • On a standard 3 percent minimum payment schedule, you can expect to pay over $12,000 in total interest charges
    • The same debt paid off with a loan at 10% APR over a 5-year term would have total interest charges of less than $2,800

    As you can see, you save a significant amount of money by consolidating your debt.

    Hard Inquiries Ding Your Credit Report

    When you apply for a new credit account to consolidate debt, the lender will check your credit, leading to a so-called hard inquiry on your credit report. Each hard inquiry can temporarily lower your credit score by up to five points because lenders look at new credit applications as a sign of risk.

    To avoid a big hit, only apply for a loan or balance transfer card you can qualify for. Dont apply for new accounts left and right and cross your fingers for approval. Multiple hard inquiries created by a credit card or personal loan application in a short period of time will definitely hurt. While those inquiries will only impact your credit score for a year, the records will linger on your credit history for two years, which could be a red flag to future lenders.

    Check your credit score before applying and take note of how your score is categorized: Is it considered fair, good, or excellent? Use that information to guide your loan or credit card selection.

    On the plus side, if you are consolidating debt, you likely wont open another new line of credit any time soon, so a temporary dip in your credit score may not matter.

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    Using A Balance Transfer Card

    A balance transfer credit card is a way to move one or more credit card debts onto a cheaper card. Balance transfer credit cards usually have a low rate or an interest free period for an introductory term, which makes them attractive, but this generally rises. There is generally a balance transfer fee to be paid too.

    Borrow Against Your Home Equity Or Retirement Savings

    1

    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.

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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.

    Debt Settlement Vs Debt Consolidation

    An important point to note is that debt consolidation loans dont erase the original debt. Instead, they simply transfer a consumer’s loans to a different lender or type of loan. For actual debt relief or for those who don’t qualify for loans, it may be best to look into a debt settlement rather than, or in conjunction with, a debt consolidation loan.

    Debt settlement aims to reduce a consumer’s obligations rather than the number of creditors. Consumers can work with debt-relief organizations or services. These organizations do not make actual loans but try to renegotiate the borrowers current debts with creditors.

    To consolidate debts and save money, youll need good credit to qualify for a competitive interest rate.

    Consolidating Debt

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    The Upside To Consolidating Credit Card Debt

    The main advantage of consolidating your various loans is that theyll all be pulled together under one lower interest rate than you were paying previously. The institution that holds your consolidated loan will pay off all your creditors in full, and youll pay the loan provider directly. Youll spend less of your money on interest and will be able to avoid late payment charges.

    The second advantage is that if you consolidate your loans soon enough, you can avoid or at least minimize the damage to your credit rating. Finally, the payment process becomes much more simplified you make one monthly payment instead of having to track several.

    What Is Credit Card Debt Consolidation

    Debt Consolidation: The [CORRECT WAY] To Do It | Debt Consolidation Credit Cards

    In basic terms, credit card debt consolidation allows you to combine several credit card balances. If youâre currently making payments on multiple credit cards each month, you may be able to combine them into one monthly payment by using a loan or a balance transfer.

    There are a couple notable benefits to consolidating debt.

    First, you may be able to lower your payments. How? By consolidating with a loan or a than your current accounts have. Some credit cards even offer 0% introductory rates to start, but that rate may last for a limited time.

    But as the Consumer Financial Protection Bureau notes, credit card debt consolidation wonât eliminate your debt. And thereâs a chance you could end up paying more in the end because of fees, interest and other factors.

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    Should I Consolidate My Credit Card Debt With A 0% Apr Card

    Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here’s how we make money.

    Committing to paying off your credit card debt is a smart idea. If youre just getting started, a good first step is finding a way to lower your interest rate this will mean faster progress and lower costs in the end.

    One possibility is using a 0% APR card to consolidate your high-interest debt. But what does this mean, and should you consider doing it? Take a look at the details below to decide if this option is right for you.

    Pros And Cons Of Consolidating Credit Card Debt With A Balance Transfer Card

    You can certainly use a debt consolidation loan to consolidate just credit card debt if you have multiple credit cards, but if your credit score is excellent you may be able to qualify for a balance transfer credit card.

    A balance transfer card allows you to consolidate credit card debt by moving your high-interest debt from one card to another, typically with a 0% introductory APR offer. Just like with debt consolidation loans, there are pros and cons of consolidating credit cards via balance transfer.

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    You May Not Get Approved For A Lower Interest Rate

    The interest rate you receive for any new loan or line of credit will depend on your . Generally, a higher credit score will allow you to qualify for lower interest rates, while a lower credit score will land you higher interest rates. It’s also a good idea to not apply for a new loan if you’ve recently applied for other lines of credit since too many hard inquiries on your credit report can lower your credit score and lead to higher interest rates. Personal loan and debt consolidation lenders do accept applicants with less than ideal credit scores while you’ll be approved for the loan, you’ll likely receive a higher interest rate if your credit score is on the lower side.

    Debt consolidation works best when you are able to receive an interest rate that’s lower than the rates you’re paying for your current debts. Many lenders allow you to check what rate you’d be approved for without hurting your credit score so you can make sure you’re okay with the terms before signing on the dotted line.

    Why Would I Consolidate Credit Card Debt

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    Credit card debt is a unique form of revolving debt. Unlike personal loans, where you make fixed repayments and pay it off in full over a specified period, credit card debt has no term.

    That means that it is one of the few types of debt which you can keep rolling over. This can be tempting, but also carries higher costs.

    In general, if you pay a credit card off in full each month, you arent charged interest, but if you only pay off a small portion of the credit card balance, youll be charged interest on any monies outstanding – often at a high rate.

    The same also applies to store cards, so if you have multiple credit cards, theres a good chance youll be paying a high rate of interest on any borrowing you allow to roll over.

    As a result, you may be able to save money by paying off credit or store card balances with a new loan, and potentially lowering your monthly repayments in the process and the rate of interest.

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    How Do I Get A Debt Consolidation Loan

    If you believe taking out a debt consolidation loan is the best option for you, take the following steps to get one:

  • Check your credit score and reports. Some lenders have minimum credit score requirements. To see if you meet those requirements, view your credit score. Also, check your credit reports to see if they have inaccurate or incomplete information that could hurt your score. You can view all three of your credit reports for free weekly through April 20, 2022, by visiting AnnualCreditReport.com.
  • Determine your loan amount. Add up the amount of debt you want to consolidate to see how much money you need to borrow. Also factor in potential origination fees, which are taken out of the loan amount.
  • Research different lenders. Review the websites of different online lenders to see eligibility requirements, loan terms and fees. Also, check with your local bank or credit union to see if it offers debt consolidation loans.
  • Get prequalified. When you prequalify, each lender will give you an estimate of what your loan rate and terms could be. Typically, the lender will only do a soft credit check for prequalification, which means your credit score wont be impacted.
  • Apply. Depending on the lender you choose, youll submit a formal application for your debt consolidation loan online, in person or by phone. Youll be asked for personal information such as your name, date of birth and income.
  • What Not To Do

    Sometimes overwhelming debt comes with devastating swiftness a health crisis, unemployment or a natural disaster. Or maybe it came a little at a time, and now creditors and collection agencies are pressing you to pay, and you just cant.

    If youre feeling overwhelmed by debt, here are some things not to do:

    • Dont pay a secured debt late in order to pay an unsecured one . You could lose the collateral that secures that debt .

    • Dont borrow against the equity in your home. Youre putting your home at risk of foreclosure and you may be turning unsecured debt that could be wiped out in bankruptcy into secured debt that cant.

    • Dont withdraw money from your retirement savings in order to repay unsecured debt. This is financial suicide.

    • Think twice about borrowing money from workplace retirement accounts as well. If you lose your job, the loans can become inadvertent withdrawals and trigger a tax bill, which is the last thing you need.

    • Dont make decisions based on which collectors are pressuring you the most that may lead to actions that arent in your best interest. Instead, take time to research your options and choose the best one for your situation.

    About the author:Bev O’Shea writes about credit for NerdWallet. Her work has appeared in the New York Times, Washington Post, MarketWatch and elsewhere.Read more

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    A Look At Credit Card Debt Consolidation Methodsand Some Potential Benefits And Drawbacks Of Those Options

    Managing debt can be stressful at any time. And itâs especially true when you fall behind on bills. If you find yourself struggling, consolidating your credit card debt could be one way to simplify and lower your payments.

    But thereâs plenty to think about as you decide whether consolidation is right for you. Keep reading to learn a few things to consider and a few methods of consolidating credit card debt, including potential risks and benefits.

    When Is Debt Consolidation Not A Good Option

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    Debt consolidation is not going to work for everyone for the simple reason that habits and motivations are different in every household.

    If you use credit cards to pay for impulsive or excessive shopping , consolidation is not a good option.

    If you got into trouble because you dont have a budget or wont stick to the one you do have or arent disciplined enough to make on time payments, then debt consolidation wont work. The same problems that got you into trouble, will continue.

    From a practical standpoint, if you can pay off your debts in 12-18 months , consolidation isnt necessary. Just do it! The fees and time associated with getting a loan wont be worth it.

    Your best bet is to seek the free advice of a nonprofit credit counselor. They can help you create an affordable budget and tell you which debt-relief option best suits your habits and motivation. And the advice is FREE!

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    Consolidate With A Personal Loan

    This is a more common way to consolidate debt and a good option if you have multiple credit cards and outstanding loans. A personal loan to cover the total amount owed could lower your interest rates and condense all your debt payments into one single monthly loan payment. Interest rates on personal loans average roughly 9-10%.

    Pros

    Youd Be Using A Secured Loan Or Line Of Credit

    Another way to consolidate debt, particularly for consumers without the best credit, is to get a secured loan or line of credit. A home equity line of credit is a popular choice.

    Opinions are mixed on this, but Id only recommend it as an absolute last resort. Credit card debt is unsecured. Although it isnt good to default on a credit card, at least the card issuer cant repossess your assets for it.

    If you consolidate your credit card debt with a HELOC or any secured financing, youve gone from unsecured debt to secured debt and put an asset at risk.

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    What Term Should I Aim For When Consolidating Credit Card Debt

    Most experts recommend that you want to aim for a term of five years or less. Any more than that runs the risk of increasing your total costs too much. It also creates a scenario where you get hit with repayment exhaustion.

    This is basically like binge eating after too many months of sticking to a diet. You get tired of budgeting and cutting back, so you end up going on a credit shopping spree to splurge. Its not a good recipe for eliminating debt.

    Its worth noting that this issue with term happens more commonly with student loans. A standard student loan term is 10 years. Federal repayment plans increase the term to 20-30 years. So, you pay off your student loan debt in about the time it takes to pay off a traditional mortgage. Its too much and often just leads to more challenges with debt.

    Do I Need A Loan To Consolidate My Debt

    Second City Advisors Offer Debt Consolidation for Bad Credit ...

    When consolidating credit card debt, there is no need to take out a loan. A debt management program eliminates debt in 3-to-5 years, without the obligation to enter into a loan agreement.

    Credit counseling agencies that offer nonprofit debt consolidation have working agreements with credit card companies to reduce the interest rate on your debt to somewhere near 8% and arrive at an affordable monthly payment.

    Consumers make the fixed monthly payment to the agency, which distributes the money to the card companies in agreed upon amounts.

    If you miss a payment or leave the program early, the only penalty is to revoke whatever concessions were made on your interest rate.

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