When Is The Right Time To Consolidate Your Credit Cards
Consolidating your credit card debt can simplify your financial life and may help save you money. Whether you seek credit counseling, roll your card debt onto a balance transfer credit card or take out a debt consolidation loan, consolidation can move your debt from multiple cards to a single monthly payment and could lower your interest rate in the process.
While credit card consolidation can improve your financial health, it’s important to understand what each consolidation option entails. If you opt for counseling, you must agree to a repayment plan and will likely have to pay fees. Balance transfer cards and loans may also charge fees, require a good to qualify and an Annual Percentage Rate will be applied after a low or no interest rate promotional period.
Yet no matter which consolidation option you choose, the key is to pay off what you owe, and to learn more about the many ways you can better manage credit card use in the future.
Whats The Difference Between A Credit Card Consolidation Loan And A Personal Loan
Theres no difference. A credit card consolidation loan is simply a type of personal loan that can be used to pay off credit card debt. However, keep in mind that you canuse a personal loan for almost any other personal expense, too such as consolidating other kinds of debt or making large purchases.
Balance Transfer Credit Card
Once youâve been approved for a credit card with a 0% APR promotional financing offer, you can consolidate your balances from numerous credit cards. The only drawback to this strategy are the balance transfer fees that youâll have to pay. You can expect nearly all 0% APR balance transfer offers to have a 3% fee thatâs added to your new balance. And while some of these cards have fees of 5%, there have occasionally been offers with no balance transfer fees from time to time.
You should also be aware that you can never transfer a balance between two accounts from the same card issuer. Thatâs because card issuers create these offers to attract new customers with new balances, not to lose out on interest charges from existing customers.
Once you have a balance transfer credit card, the best way to use it is to pay off your balance before the promotional rate expires and interest starts to accrue on the remaining balance at the standard rate.
Things To Consider Before Consolidating Credit Card Debt
As you evaluate whether to consolidate your credit card debt, be sure to keep a few things in mind.
- Will your payment be lower? Take a look at your current credit card balances and interest rates, and compare them to your debt consolidation options. Taking out a new loan may only be worthwhile if your new payment is lower or you save enough on interest. Try using a debt consolidation calculator to help you figure this out. Dont forget to factor in the fees and other costs of your new loan.
- Can you control spending? If youve accumulated debt because youre regularly spending more than you earn, consolidating that debt may not help without a change in your spending, earnings, or both. Make sure you have a balanced budget and can stick to it before you go down the consolidation path. Otherwise you run the risk of landing deeper in the hole by piling on still more debt.
- What is your credit score? You may need a good credit score to qualify for some of the best debt consolidation options, or at least the best rates. It may be worthwhile to boost your credit score before working on consolidating credit card debt.
Using A Balance Transfer Card
Instead of taking out a personal loan, you could apply for a credit card that allows you to transfer and combine the balances onto a single card. Look for a card that has no balance transfer fee and an interest rate of 0% for at least a year.
“In many cases, I think finding a credit card that offers an introductory 0% APR for a period of time and does not charge a fee for balance transfers is a good way to go,” Roberge says.
But this strategy is also not without pitfalls, he says. “The biggest thing to be careful with if you go that route is to ensure you make every single payment on time and in full,” Roberge says. With most 0% APR offers, if you miss even a single payment or pay late, you nullify the 0% offer and have to pay interest on the full balance. It’s important to read the fine print of the card agreement before signing up, as well as assess your own personal habits.
If you can’t guarantee that you’ll be able to pay the card every month, you could end up even more in the hole, Roberge says. Especially if the APR on the new balance transfer card is higher than the original cards. “Set up an automatic payment, set calendar reminders whatever you have to do to make sure you don’t miss any payments,” he says.
Additionally, you may be approved for a balance transfer card, but not approved to transfer over the full balance of your outstanding debt. In that case, you may need to take out multiple cards, slightly defeating the purpose of a clean consolidation plan.
How To Find An Accredited Nonprofit Credit Counseling Agency
Legitimate credit counseling agencies offer financial help, including debt management plans and debt consolidation advice, for free or at a minimal charge. These agencies also provide credit counseling, budgeting guidance, and debt management advice at no or low cost. To find a legitimate credit counseling agency:
- Look for a company that’s accredited, usually by the Council on Accreditation or the International Organization for Standardization .
- Check to make sure no complaints have been filed against the company with your state attorney general’s office, the Better Business Bureau, and local consumer protection agencies.
It Wouldnt Save You Much Money
Debt consolidation isnt free. Most balance transfer credit cards charge you 3% for each balance you transfer, and youll start paying interest on those balances again once the 0% intro APR ends. A loan may have an origination fee and a prepayment fee, ensuring you pay the lender at least a certain amount on top of your principal and the interest you incur over the loan term.
With debt thats going to take over a year to repay and will cost you a lot in interest, the savings makes consolidation worthwhile. But if its debt you could realistically repay in a matter of months, its probably not worth the time spent and the fees for such small savings. Calculate how much youd pay with and without debt consolidation to help make your decision.
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You May Pay More In Interest Over Time
Even if your interest rate goes down when consolidating, you could still pay more in interest over the life of the new loan. When you consolidate debt, the repayment timeline starts from day one and may extend as long as seven years. Your overall monthly payment may be lower than youre used to, but interest will accrue for a longer period of time.
To sidestep this issue, budget for monthly payments that exceed the minimum loan payment. This way, you can take advantage of the benefits of a debt consolidation loan while avoiding the added interest.
Choose Credit Card Refinancing If:
- You have good credit, particularly a credit score of 680 or higher.
- You can pay off what you owe on a 0% rate card in the 12-18 month introductory period.
- You get a high enough balance limit on the card to transfer all your high-interest cards to the new card.
- Your objective is to lower your monthly payment, giving you a better chance of paying everything off.
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Whats The Difference Between Debt Consolidation And Debt Settlement
Theres a huge difference between debt consolidation and debt settlement.
Weve already covered consolidation loans: a type of loan that rolls several unsecured debts into one single bill. But debt settlement is when you hire a company to negotiate a lump-sum payment with your creditors for less than what you owe.
Sounds good, right? Someone does the dirty work and you get to keep more of your paycheck? Not so fast. These debt settlement companies also charge a fee for their services, usually anywhere from 2025% of your debt! Ouch. Think about it this way: If you owe $50,000, your settlement fees would range from $10,00012,500.
And if thats not bad enough, dishonest debt settlement companies often tell customers to pay them directly and stop making payments on their debts. Once you fork over the fee, they promise to negotiate with your creditors and settle those debts on your behalf.
If it sounds too good to be true . . . it is.
Most of the time, these companies will just take your money and runleaving you on the hook for late fees and additional interest payments on debt they promised to help you pay!
Debt settlement is a scam, and any debt relief company that charges you before they actually settle or reduce your debt is in violation of the Federal Trade Commission.1 When it comes to debt settlementstay away. Period.
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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.
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.
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You Risk Missing Payments
Missing payments on a debt consolidation loanor any loancan cause major damage to your credit score it may also subject you to added fees. To avoid this, review your budget to ensure you can comfortably cover the new payment. Once you consolidate your debts, take advantage of autopay or any other tools that can help you avoid missed payments. And, if you think you may miss an upcoming payment, communicate that to your lender as soon as possible.
What Does ‘credit Card Debt Consolidation’ Mean
If you have several credit cards with high interest rates and large balances, you may consider consolidating your debt. This means taking out a new credit product, such as a personal loan, to pay off your existing credit card balances and leave you with a single monthly payment.
You might choose to do this for a number of reasons. For example:
- Consolidating your credit cards into a new loan could get you a lower interest rate, and possibly reduce your monthly payment amount.
- You might also be able to pay off your debt more quickly compared to making a minimum payment on each card.
- A single payment is also simpler to keep track of than multiple credit cards, each with its own minimum payment and due date.
Consolidate With A Home Equity Loan Or Line Of Credit
If you are a homeowner then you can potentially use the equity you have built up over time by securing a low interest loan through a second mortgage.
Home owners have the advantage of building up equity with the properties over time, the equity built is the difference between your mortgage loan balance and your homes appreciated value.
when utilizing your homes equity, you are essentially using the value of your home as collateral.
When borrowing against your homes value, , you can either obtain a one time lump sum loan or home equity line of credit.
A home equity loan comes in one single cash payment and often comes with fixed repayment interest rates and the majority of home equity loans have a minimum loan amount of $10,000 or more
Home equity lines of credit works much like a credit card, you will still be borrowing against your home however you will have access to a credit line that you can withdraw from and as you repay your outstanding balance the amount of credit becomes available again.
HELOCs typically have lower interest rates then most other types of loans and allow you to borrow against your home as little or as much as you need during your draw period which is around 10 years.
Home equity loans traditionally have lower interest rates then other types of loans , the interest is also a fixed interest rate meaning that you will know exactly what your repayments are whilst HELOCs have varying rates which could mean lower rates.
How Does Consolidating Credit Card Debt Affect Your Credit
Debt consolidations effect on your credit depends on the method you choose and where your financial situation currently stands. Consolidating with a personal loan, for example, could help your credit score by reducing the amount of revolving debt you have. Using a balance transfer credit card, however, could hurt your score if youre pushing your credit limit.
You may consider working with a nonprofit credit counselor to help weigh your options and how theyll affect your credit in the long-term. They can also help you learn ways to avoid credit problems in the future.
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Move Some Or All Of Your Card Debt To A Balance Transfer Card
Balance transfer credit cards, offered by many banks across the country, are designed for cardholders who want to pay down an existing balance.
Benefits of balance transfer cards
- Balance transfer cards often offer lower interest rates than other credit cards.
- Many balance transfer cards come with no annual fee.
Drawbacks of balance transfer cards
- A balance transfer card’s APR may not be lower than the interest rate you’re currently paying: be certain to understand the APR on your current credit cards before you commit to a balance transfer.
- You may be subject to a high APR on any balance that you don’t manage to pay off before the low or no interest rate promotional period expires.
- Balance transfer cards could require you to pay a transfer fee on either each transfer or as a percentage of the amount transferred.
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How Fast Can I Get A Credit Card Consolidation Loan
This mainly depends on the type of lender you choose. For example, getting a credit card consolidation loan through an online lender could be a faster process than going through a traditional bank or credit union.
Thetime to fundfor a credit card consolidation loan also depends on the lender. Here are the funding times you can generally expect:
Online lenders: Less than 5 business days
Banks: 1 to 7 business days
1 to 7 business days
There are also some lenders that offerfast personal loans with quicker funding times. For example, several of Credibles partner lenders provide same- or next-day loan funding after approval.
If youd like to get your loan funds as soon as possible while avoiding delays, be sure to:
Fill out the application as accurately as you can
Submit any required documentation in a timely manner