Friday, December 2, 2022

Is It Smart To Consolidate Your Credit Card Debt

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A Debt Consolidation Can Help You Lower Your Monthly Payment And Help Improve Your Credit But Only If You Stick To A Plan To Pay Down Your Debt

Credit Card Debt: How to Consolidate it (2019)

If you have high-interest credit card balances on multiple accounts, just making those monthly payments can be so tough that you cant afford the things you really need or want much less save any money. It may also stress you out. In this situation, debt consolidation might be a smart decision. But before you get started, lets dig in to understand how debt consolidation can affect your .

Debt Consolidation Mortgage Cons

Paying off high-interest credit cards with a low-rate mortgage refinance might sound like a no-brainer. But there are some very real pitfalls to watch out for.

Debt consolidation strategies have a high failure rate. And say that many who use home equity to pay off credit cards will then run their cards up again until theyre in even worse shape than when they began.

Remember: Unlike unsecured credit card or personal loan debt, mortgage debt is secured , cautions Ailion.

That means youre pledging your equity as collateral for the money you borrow. If you happen to default and declare bankruptcy, debts that were previously dischargeable are now secured by your equity.

Could Raise Your Interest Rate

If you qualify for a lower interest rate, debt consolidation can be a smart decision. However, if your credit score isnt high enough to access the most competitive rates, you may be stuck with a rate thats higher than on your current debts. This may mean paying origination fees, plus more in interest over the life of the loan.

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Home Equity Loan For Debt Consolidation

Pros
  • Your home is used as collateral.
  • Fees, including closing costs.
  • It can take a few weeks to close on a home equity loan.

Best for:

Home equity loans can also be used to pay off high-interest credit card debt at a lower interest rate. To qualify for this type of loan, youll typically need to have at least 15% equity in your home. Calculate your home equity by subtracting the amount you owe on your mortgage subtracted from your homes value.

When you open a home equity loan, youre putting up your home as collateral to the lender. This can grant lower interest rates than with unsecured forms of debt, like personal loans and credit cards, but it also comes with a large amount of risk. If you dont repay your home equity loan, you could lose your home.

  • Borrow from your own retirement savings.
  • Low interest rates, which you pay back to yourself.
  • May face an early withdrawal penalty and tax obligations.
  • If you lose your job, you may have to repay the loan in 90 days.
  • Not all 401 plan servicers allow this.

Best for:

Borrowing against your retirement savings using a 401 loan is one way to pay off credit card debt. 401 loans allow you to borrow up to $50,000 or half the vested amount, whichever is less. Youll have up to five years to repay the loan, and you must make payments at least quarterly.

Navigating Credit Card Debt During Covid

Should You Consolidate Your Credit Card Debt?

If the financial impact of the coronavirus pandemic has you looking for ways to consolidate your credit card debt, youre not alone. Many people may find themselves with more debt right now or may be facing debt issues theyve never encountered before.

If that describes your situation, you may have more than one option.

Weve compiled some resources to help you find relief measures announced by the government, credit card issuers and more. If you can take advantage of these relief measures, they may help ease some of your financial burden, making your debt more manageable. Check out our summaries of those resources below.

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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.

You Can Reduce Your Interest Rate

This may not seem like much, but if you maintain a $5,000 balance on your card over the course of the year, you’d pay more than $800 in interest by year’s end.

Balance transfer credit cards, personal loans, home equity loans, and 401s can all reduce the interest you pay — sometimes substantially. If you opt for a balance transfer credit card offering a 0% introductory interest rate, you’d pay no interest at all until the promotional rate expired. Every dollar paid toward debt would go to reducing principal.

A personal loan could also reduce your interest rates. Say you had two credit cards and owed $2,500 at 17% APR and $3,000 at 22% APR and you were making a $100 monthly payment on each. It’d take you 3 years and 9 months to repay both cards and you’d pay $2,003 in interest.

But, if you consolidated debt using a 36-month loan at 9.24%, your monthly payment could be reduced to $175.51. Total interest paid would be $818 and you’d repay the debts in 3 years. You’d save $1,184.51 in interest and reduce your payment time by 9 months.

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Does Debt Consolidation Work On A Limited Income

Debt consolidation can be difficult for people on a limited income. There must be room in your monthly budget for a payment that at least trims the balance owed. Even with a limited income, however, there can be places where you reduce expenses — dont eat out eliminate cable and other entertainment spending no trips to clothing stores — to make debt consolidation work. It may come down to how committed you are to eliminating debt.

Credit Card Consolidation Loan

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Pros:

  • Fixed interest rate means your monthly payment wont change.

  • Low APRs for good to excellent credit.

  • Direct payment to creditors offered by some lenders.

Cons:

  • 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.

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How Do I Consolidate My Credit Card Debt

There are two main options you can consider when you need to consolidate your credit card debt a balance transfer credit card or a debt consolidation personal loan.

  • Balance transfer credit card this involves moving your debt into a new credit card with a lower or no interest rate for a set period of time. This gives you some much needed breathing room to get back on your feet and pay down your debt.
  • Debt consolidation personal loan this involves moving your debt into a personal loan with a lower interest rate than credit cards, and a fixed term so youll be encouraged to pay off the debt through minimum repayments. If you have multiple credit card debts, this helps to simplify your repayments. Learn more about bad credit personal loan options here.
  • Limited Terms On New Credit

    Another way that lenders and creditors protect against risk is to limit the terms they offer to new customers.

    For lenders, this means that they may cap personal loan limits. Instead of allowing you to borrow up to $50,000, the lender may only offer $20,000 or lower, depending on your credit. If you are considering a credit consolidation loan, you need to make sure you can qualify for a loan amount large enough to pay off all your credit card balances.

    For credit card companies, there are two ways that they limit terms during an economic downturn. One is to offer a lower credit limit on the card. The other is to reduce the 0% APR period you enjoy when you first open the account.

    Two years ago, credit card companies would offer 0% APR for up to 24 months on balance transfers, Herman explains. These days, most creditors limit that introductory period to 12 to 18 months.

    This is important for people considering getting a balance transfer card to consolidate. Lets say you want to consolidate $12,000 in credit card debt. With a 24-month 0% APR period, you could pay off the entire balance during the interest-free period with $500 payments. However, if the introductory period is only twelve months, you would need to pay $1,000 per month.

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    You Have Trouble Managing Your Credit Card Payments

    When you have balances across multiple , managing payments can be tricky. You’re more likely to forget a due date, miss a payment, and get charged a late fee. Or you might not have the money in your bank account to cover every payment.

    Debt consolidation helps simplify things by cutting down on your payments. Once you’ve consolidated your , you only have one monthly payment, which is much easier to keep track of.

    If your credit card payments have become too much to handle, you may also pay less per month through debt consolidation. Loans are particularly good for this. You can request a longer loan to get a lower monthly payment amount. Keep in mind that a longer loan does mean more interest charges.

    You May Pay More In Interest Over Time

    Is it Smart to Pay Your Credit Card Debt with Your ...

    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.

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    Does Debt Consolidation Hurt Your Credit Score

    Does debt consolidation hurt your credit score? Yup. And we arent fans of credit scores, but you should know exactly what happens if you consolidate your debt.

    The way credit scores are set up, they really value you having a debt for a long time and paying consistently on it over time. When you roll over old debts into a new debt, you hurt that consistency in the eyes of FICO. So, yes, your credit score will suffer if you choose debt consolidation.

    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.

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    Alternative Option: Balance Transfer Credit Card

    You may be able to apply for a new credit card that allows you to transfer balances from existing credit cards, perhaps as a lower interest cost to you. The benefits of a credit card balance transfer include:

    • Interest-free payments. If you qualify for a 0% APR balance transfer, you wont pay any extra interest charges for the promotional period, which would allow you to pay down your balance more cheaply.
    • No balance transfer fee. Most credit cards charge a fee when you transfer a balance, but you can find a few that waive the balance transfer fee.
    • New perks. If you have decent credit, you might qualify for a new card that offers cash back, travel perks or other types of deals for cardholders.

    The drawbacks of a credit card balance transfer include:

    What Is Debt Consolidation And Why Should I Do It

    Credit Card Balance Transfer For Debt Consolidation

    Credit card debt consolidation is when you combine your multiple existing credit card debts into one to better manage your repayments and minimise the amount of fees and interest youre paying. This is usually done through a debt consolidation personal loan or a balance transfer credit card.

    However, you should ensure the consolidated debts interest rates and/or fees are not higher than what you were paying on your previous debts.

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    Explore Your Debt Consolidation Options

    • How it works: Once you know your numbers, you can start looking for a new loan to cover the amount you owe on your existing debts. If you’re approved for the loan, you’ll receive loan funds to use to pay off your existing debts. Then you start making monthly payments on the new loan.
    • Consider your options. Wells Fargo offers a personal loan option for debt consolidation. With this type of unsecured loan, your annual percentage rate will be based on the specific characteristics of your credit application including an evaluation of your credit history, the amount of credit requested and income verification. Some lenders may have secured loan options which may offer a slightly lower interest rate, but keep in mind you are at risk of losing your collateral if you fail to repay the loan as agreed.
    • Use our online tools. Wells Fargo customers can use the Check my rate tool to get personalized rate and payment estimates with no impact to their credit score. Funds are often available the next business day, if approved

    Home Equity Line Of Credit

    Some people use a home equity line of credit as a type of debt consolidation. This secured loan allows you to borrow cash against the current value of your home, using the equity youve built up in your home as collateral.

    Equity is the difference between what you owe on the house and its market value. So, with a HELOC, youre basically giving up the portion of your home you actually own and trading it in for more debt so you can pay off your other debts. Thats not how you get ahead. Thats how you stay behind. Longer.

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    Equity In Owned Vehicles

    If you have a vehicle that is paid off or has a low balance in comparison to what it is worth, this could be an interesting route to take. Taking a loan out, using your vehicle as collateral, would allow you to get a loan to pay down your other creditors. In this situation, you gain the ability to receive an auto loan rate which is typically much lower than an unsecured personal loan.

    The downside here would be a limitation of the loan being capped at the value of the vehicle. Also, when carrying an auto loan, most lenders require full auto insurance coverage on the vehicle, which could increase the monthly expenses if normally carrying PLPD. That said, this is a great way to leverage an asset to obtain a lower loan rate.

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