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Should You Consolidate Credit Card Debt

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Should You Consolidate Your Debt?

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How Do Credit Card Consolidation Loans Compare To Balance Transfer Card Offers

Compare paying $15,000 on your refinancing credit card to paying it off with a personal loan:

  • Personal loan: If you take out a personal loan at 9.5% for 4 years, the resulting payment is $377 per month. The total interest paid will be $3,089. So youll pay a total of $18,089.
  • Make the same $377 monthly payments on a credit card with an 18-month introductory period with 0% interest. Over those 18 months, youll have paid off $6,786. Once the balance transfer offer expires, youll start paying interest on the remaining $8,214 balance.

Assuming an interest rate of 16%, if you continue to pay $377 a month, it will take you an additional 26 months to pay off the balance. After 44 months, you will have paid at least $1,414 in interest, totaling $16,414.

In this case, the balance transfer method has got a slight edge.

Of course, many variables affect these numbers. For example, you dont have a fixed interest rate with a credit card. When it goes up, you pay more in interest and take longer to pay the balance. With a credit card, you also need the willpower to make the $377 payment each month.

Additionally, you may be eligible for lower or higher interest rate cards and loans. Researching and comparing your options is essential.

There are many cases where a personal loan may be the better option and others where a balance transfer credit card delivers more benefits.

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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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.

How It Works With New Financing

Why Should You Consolidate Credit Card Debt?

The most common form of consolidation that uses new financing is a debt consolidation loan. However, there are also other versions, such as a Home Equity Line of Credit or balance transfer credit card. Here are the steps involved.

  • You apply for a loan or credit line thats large enough to pay off all the debts you wish to repay.
  • You get approved based on your credit score approval requirements vary by lender and the type of consolidation loan that you want.
  • You choose a term for the loan that offers monthly payments you can afford.
  • A shorter-term means higher monthly payments, but lower total costs
  • A longer-term decreases the monthly payments but increases total costs
  • Once approved, you use the funds you receive to pay off your existing debts.
  • This leaves only the consolidation loan to repay.
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    What Is A Credit Card Consolidation Loan

    With a credit card , you borrow money to pay off your existing credit card debts.

    You then pay off this new loan with a single, recurring monthly payment. This allows you to manage your debt with one easy payment per month.

    If youre someone who has several credit card bills, you may be able to pay off your higher-interest debt faster by consolidating your credit card debt into a single with a lower interest rate.

    What You Need To Know

    • Combine multiple credit card balances to benefit from a lower interest rate and pay off debt faster while saving money
    • Consolidate your credit card debt by transferring your balances to a new credit card with a lower interest rate or by getting a personal loan
    • Use the debt snowball or avalanche method to reduce your credit card balance without taking on new debt

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    Other Debt Consolidation Options

    If you have equity in your home, a home equity loan or line of credit could be a lower-interest way to consolidate debt.

    No matter what option you choose, remember that no option is risk-free. Debt consolidation doesnt work for everyone, every loan comes with its own risk.

    The only way to know if a personal loan to consolidate debt is right for you is to sit down with a financial institution to go over your personal situation. Its important to meet with someone you trust and make a reasonable plan. Be certain you make a plan that you can stick to and pay off your other debts according to the agreements.

    How Much Does A Debt Consolidation Loan Cost

    Should I Consolidate My Debt? | Debt Consolidation Pros and Cons

    Compare the costs of different debt consolidation loan offers by requesting prequalification. With prequalification, the lender will provide an estimate of the available APR, loan amount, and monthly payment based on your credit score, income, and other financial details. Make sure the prequalification process uses a soft rather than hard pull of your credit to avoid an unwanted score decrease.

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    What Is Debt Settlement

    While debt consolidation allows you to combine multiple debts into a single loan, debt settlement utilizes a very different strategy, When you settle debt, youre effectively asking one or more of your creditors to accept less than whats owed on your account. If you and your creditor reach an agreement, then you would pay the settlement amount in a lump sum or a series of installments.

    The advantage of debt settlement is that you can eliminate debts without having to pay the balance in full. This may be an attractive alternative to bankruptcy if youre considering a Chapter 7 filing as a last resort when in dire financial straits.

    Its important to remember, however, that creditors are under no obligation to enter negotiations or accept your offer. Also, youll need to keep in mind that offering a settlement requires you to have cash on hand to pay agreed-upon amounts. If you dont have the cash to negotiate with, then seeking a debt consolidation loan may be the better option.

    Freedom Debt Relief Program To Settle Credit Card Debt

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    How Do You Use Debt Consolidation

    Your first step is to write down all the debt you want to pay off. In general, you can include credit cards, car notes, utility bills, medical bills – almost anything. Include the creditors name, the amount owed, and the interest rate on your list.

    Total up what you owe. If you can pay off this total in less than a year, debt consolidation is not a good option.

    Your next task is to find a loan that covers your debt. Look at the interest rate and any fees like origination fees that the financial agency charges. Remember that your loan will be based on your credit score.

    The higher your credit score, the lower your interest rate will be. Take time to shop around.

    Next, add up all the bills with interest rates higher than the potential loans. Dont include bills with lower interest rates – it doesnt make sense to take out a loan with a higher rate to pay off lower rates!

    Now, apply for the loan. Always know what you are getting. Pay off your debts as soon as the money hits your account. Otherwise, you may be tempted to spend it on something else.

    Your final task is to pay off the loan and any other debts. Make sure you have a plan to stay out of debt in the future.

    Does Debt Consolidation Hurt Your Credit

    5 Methods for consolidating Credit card debt

    Consolidating debt with loans is a quick way to lower your credit score. Consolidating debt can cause credit scores to drop. The credit score is also affected by consolidation loans. Your credit utilization ratio can be affected by consolidating multiple accounts into one loan. This can also affect your score.

    Consolidating your debt into one affordable payment will increase your credit score in the long term. Your credit score is 35 percent dependent on your payment history. Therefore, making timely payments will improve your score. A personal loan to consolidate debt can be a great way to improve your credit score and revolving credit.

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    How To Consolidate Your Debt Without Affecting Your Credit

    It is crucial to find creative ways to repay debt, as there are many American households with high credit cards and loan balances. Debt consolidation is an option if you owe money to multiple creditors. Consolidating your debt will allow you to organize all your accounts and offer a lower interest window for beginning payments.

    Debt consolidation has its downsides. Although debt consolidation can temporarily affect your credit score, there are ways to reduce the impact.

    Navigating Credit Card Debt During Covid

    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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    Can Improve Credit Score

    Applying for a new loan may result in a temporary dip in your credit score because of the hard credit inquiry. However, debt consolidation can also improve your score in a number of ways. For example, paying off revolving lines of credit, like credit cards, can reduce the credit utilization rate reflected in your credit report. Ideally, your utilization rate should be under 30%, and consolidating debt responsibly can help you accomplish that. Making consistent, on-time paymentsand, ultimately, paying off the loancan also improve your score over time.

    How We Make Money

    When to Consolidate Credit Card Debt

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    At Bankrate we strive to help you make smarter financial decisions. While we adhere to stricteditorial integrity, this post may contain references to products from our partners. Heres an explanation forhow we make money.

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    Consolidating Bills And Debt Can Eliminate Debt Quickly

    Once you complete the process of consolidation, you may find that your debts will be paid off much more faster than before. This happens as a direct result of the lower interest rates you will be paying and the more of your payment that will go towards principal. You can get out of debt even faster if you take the steps to pay as much as you can afford each month! As a matter of fact, there are other ways to reduce debts, such as hardship programs, debt settlement, and more. You can use these methods of debt elimination to work at the same time as a credit card consolidation loan. Combining different tactics can have you free of debt in a much shorter timeframe. On average some people can be debt free in as little as 3 years by employing this different approaches.

    How To Use Debt Snowball To Pay Off Debt

    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 ofour partnersandhere’s how we make money.

    With the debt snowball method of paying off debt, you reward yourself for wins along your debt payoff journey. You pay your smallest debts in full first, then roll the amount used to pay your first debts into paying off your bigger ones much like rolling a snowball down a hill.

    Small victories upfront the satisfaction of seeing debts eliminated one by one keep you engaged. Its very different from the debt avalanche strategy, which prioritizes high-interest debt to save money but may take longer to get the first debt wiped out.

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    Youre Struggling To Make Some Of Your Monthly Payments

    How difficult it is to make your payments every month is a good indicator for most people if a debt problem is developing.

    Requesting a debt consolidation appointment with one of our other Member Service Specialists is an easy way to understand your unique situation and what solutions are available for you.

    One of the main problems that debt consolidation solves is reducing the number of different payments you have to make each month. With a lower monthly payment, you can worry less about your cash flow and focus on financial growth.

    Do Lenders Perceive Debt Consolidation Negatively

    Should you use a personal loan to consolidate credit card ...

    Most lenders see debt consolidation as a way to pay off obligations. The alternative is bankruptcy, in which case the unsecured debts go unpaid and the secured debts have to be foreclosed or repossessed. Lenders dont like either of those choices. You may see some negative impact early in a debt consolidation program, but if you make steady, on-time payments, your credit history, credit score and appeal to lenders will all increase over time.

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    What Are Some Effective Strategies For Paying Off Debt

    What are some effective strategies for paying off debt? Once you consolidate and streamline your debt, its time to get down to business and reach that zero balance. It takes planning, support, discipline, commitment and some strategies to put into action. As you start your debt repayment journey, these six strategies can help you reach your zero-debt destination.

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    Top Credit Card Wipes Out Interest Until 2023

    If you have credit card debt, transferring it to this top balance transfer card secures you a 0% intro APR into 2023! Plus, you’ll pay no annual fee. Those are just a few reasons why our experts rate this card as a top pick to help get control of your debt. Read our full review for free and apply in just 2 minutes.

    Video: How to avoid paying annual credit card fees

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    Your Credit Card Debt Relief Options During Covid

    If the financial impact of the coronavirus pandemic has you thinking about consolidating your credit card debt, youre not alone and you may have additional avenues for financial relief.

    Below are links weve compiled on relief measures that some credit card issuers, other creditors and the government have announced to help people during this time. Check out these summaries to look for measures and creditor programs that could apply to your situation.

    Could Lower Interest Rate

    Is It A Good Idea To Consolidate Credit Card Debt

    If your credit score has improved since applying for other loans, you may be able to decrease your overall interest rate by consolidating debtseven if you have mostly low-interest loans. Doing so can save you money over the life of the loan, especially if you dont consolidate with a long loan term. To ensure you get the most competitive rate possible, shop around and focus on lenders that offer a personal loan prequalification process.

    Remember, though, that some types of debt come with higher interest rates than others. For example, credit cards generally have higher rates than student loans. Consolidating multiple debts with a single personal loan can result in a rate that is lower than some of your debts but higher than others. In this case, focus on what youre saving as a whole.

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