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What Happens When You Consolidate Credit Card Debt

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How Credit Card Consolidation Can Put You In More Debt.

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Seek Help From A Friend Or Family Member

If the pit of debt is too deep to get out of, consider asking someone you are close with to help dig you out. You can either ask your loved one for a loan directly or ask them to cosign a consolidation loan through a lender or bank.

When it comes to borrowing money from a loved one, be careful. It can be tough to ask a friend for money, and the effects on your relationship can also be dire if things go south. So, if they agree to help, make sure you communicate the loan terms and repayment plan clearly. When you borrow from someone you know, it lessens the stress from dealing with a bank.

Instead of asking for the cash, you can instead ask them to cosign a loan. When your friend or family member agrees to cosign, their credit and income are taken into consideration as the basis of repayment for the loan. This makes your chances of approval go way up, especially if your cosigner has good or excellent credit.

Just remember with both options to be mindful of your loved one and appreciative of their help. Your financial problem also in a way becomes theirs if you arent careful, honest, and prompt with payment.

How To Consolidate Credit Card Debt With A Personal Loan

Using a loan to consolidate credit card balances is another DIY option you can use if you have good credit. You take out a loan the lowest interest rate possible and use the funds you receive to pay off your credit cards. This leaves only the loan to repay.

This is often the best way to consolidate credit card debt if you want lower monthly payments. Depending on the term you choose, you can significantly reduce how much you pay each month. But you still get out of debt faster than you would with traditional payments thanks to the low APR.

  • Shop around for the right debt consolidation loan. You want to aim for low APR, low fees and a term that will give you monthly payments you can afford.
  • When you find the best loan for your needs, you apply. Only apply for one loan, because applying for multiple loans at once will hurt your credit score.
  • Choose a term that offers monthly payments you can afford. A longer term means lower monthly payments, but higher total costs. A shorter term will reduce total costs, but it means higher monthly payments.
  • Once approved, the funds are disbursed to pay off your credit card balances. In some cases, the lender will give you the money to disburse. In others, theyll pay your creditors directly.
  • Pay off the loan with fixed payments. If the loan doesnt have any early repayment penalties, you can also make extra payments. For instance, pay off a big chunk of the debt with your next tax return.
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    You might be offered a secured loan if you owe a lot of money or if you have a poor credit history.

    Its important to get free debt advice before you consider taking out a secured debt consolidation loan. This is because they wont be right for everyone and you could just be storing up trouble or putting off the inevitable.

    Disadvantages Of Consolidation Loans

    Why I

    Possible disadvantages to a consolidation loan include:

    • if the loan is secured against your home, your property will be at risk of repossession if you can’t keep up your payments
    • you could end up paying more overall and over a longer period
    • you usually pay extra charges for setting up and repaying the new loan
    • all your eggs will be in one basket – if you get into difficulties, it may be more difficult to come to a new arrangement with a single lender
    • if you have a poor credit rating, you may only be able to get a loan at a high interest rate or secured against your home
    • if you dont pay off all your existing debts, you may struggle to make the payments on top of the new loan

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    What Is Credit Card Consolidation

    The word consolidate means to combine multiple parts into a single and more effective part. Debt consolidation follows this definitionit is the process of combining multiple payments into one larger and more effective payment.

    When it comes to credit card consolidation, the process is like any other type of debt consolidation. You roll multiple, and typically high-interest, credit card payments into a single obligation. This is done with the intention of obtaining a lower interest rate, and to save you from the stress of keeping up with several payments.

    Debt consolidation isnt limited just to credit cards, however. You can consolidate other debts including student loans, personal unsecured loans, payday loans, medical bills, and even rent and utility bills. But, credit cards remain amongst the most popular types of consolidated debt.

    Who Can Help Me Consolidate My Debt

    The best answer is a financial advisor you trust. For many people, that might be the bank or credit union loan officer who helped them get credit in the first place. If you dont have a personal relationship with a lending institution, the best idea is to call a nonprofit credit counseling agency and speak with a certified counselor. The nonprofit status means counselors must provide answers that are in the customers best interests, not the companys bottom line.

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    Try Shifting Debts To 0% First

    There’s no cheaper borrowing than interest-free, so this is always the first step to try. There are two main routes for this, depending on the type of debts you have . Importantly, DON’T use them for new spending as it isn’t usually at the cheap rate .

    • Shift debt from existing credit card to 0% with a balance transfer card. This involves getting a specialist new card that repays debts on other credit or store cards for you, so you owe it instead but at 0%. The exact 0% period varies per card, but is often upwards of two years. The longest deals typically have a one-off fee as a percentage of the amount borrowed, yet there are cards that have no fee, so you can sometimes even shift debt for free. See our Top Balance Transfer Cards guide for full info, top picks and our clever eligibility calculator which can show your acceptance odds before applying.
    • Overdrafts or high-cost loans use a 0% money transfer credit card loan to clear it. A few specialist cards offer a 0% money transfer that lets you pay cash into your bank for a small fee. You then owe the card instead but interest-free for a set number of months which is usually much cheaper than loans. Crucially, to get the cheap rate never just take cash from an ATM. You’ll need to ask your card provider for a money transfer. Full step-by-step help is in 0% Money Transfers.

    You’ll need to be disciplined for this to work

    Can You Use An Old Card After A Balance Transfer

    How to Consolidate (and OBLITERATE!) Credit Card Debt

    If you have an outstanding balance remaining on your old card after a balance transfer, making monthly payments will follow until you clear the debt entirely. This can be the case if your new cards credit limit is less than the balance you owe toward your existing card. For example, say you have an outstanding balance of $10,000 on your old card and get a new card with a credit limit of $7,000. Even after transferring $7,000, youll still have an outstanding balance of $3,000.

    You may continue using the card as before even if youve paid the entire balance. Closing the account might have a negative effect on your creditworthiness.

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    Missing Payments Will Set You Back Even Further

    If you miss one of your monthly loan payments, youll likely have to pay a late payment fee. In addition, if a payment is returned due to insufficient funds, some lenders will charge you a returned payment fee. These fees can greatly increase your borrowing costs.

    Also, since lenders typically report a late payment to the credit bureaus after it becomes 30 days past due, your credit score can suffer serious damage. This can make it harder for you to qualify for future loans and get the best interest rate.

    To reduce your chances of missing a payment, enroll in the lenders automatic payment program if it has one.

    Takeaway:Before you take out a debt consolidation loan, make sure you can afford the monthly payments. Missing a payment can lead to late fees and a lower credit score.

    Shop For Cards That Your Better Credit Deserves

    Find a credit card with a lower APR or a rewards program that matches your hobbies and cut up your paid-off, high-APR cards. With the higher credit scores that come with debt repayment, you’ll begin to earn approval for rewards cards that offer either cash back, travel discounts, or gifts. The true sign of great credit is when you spend less than what you earn.

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    If You Are Struggling With Managing Your Debt

    Struggling to cope with you financial worries is a horrible situation to be in, but no debt is unmanageable and there are places you can turn to for help:

    • StepChange offers free advice and helps you arrange a debt management plan

    • Citizens Advice has advice on getting help with different types of debt during lockdown

    • National Debtline is another charity that offers free and independent debt advice over the phone and online

    • PayPlan is an independent provider of free DMPs

    If you think you have been mistreated by a bank, lender or insurance provider and it has failed to resolve your dispute, contact the freeFinancial Ombudsman Service. The service is free, independent and can compel businesses to compensate anyone who has lost money.

    When Is Debt Consolidation Not A Good Option

    Consolidating Credit Card Debt

    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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    When Getting A Debt Consolidation Loan Doesnt Make Sense

    A debt consolidation loan definitely doesnt make sense if:

    • you cant afford the new loan payments
    • you dont clear all your other credit commitments or debts with the loan
    • you end up paying more overall , or
    • you need help sorting out your debts rather than a new loan a debt adviser might be able to negotiate with your creditors and arrange a repayment plan.

    Try Our Debt Consolidation Loan Calculator

    Work out how much you’d like to borrow, with our debt consolidation loan calculator. The debt consolidation calculator results we display are based on the representative APR for the amount you enter. Your actual rates and repayments might differ and will be based on your personal circumstances, the loan amount and term.

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    Ways To Consolidate Your Debt

    There are several ways to consolidate debt, but the two most common are balance transfer credit cards and personal loans. If youre a homeowner, you could also consider a home equity loan or home equity line of credit . Both are secured loans, so interest rates should be lower. If youre not a homeowner, choose one of the following:

    Managing Credit Card Debt In A Covid

    Debt Consolidation & Management : Does Consolidating Credit Cards Hurt Your Credit?

    When times are tough, its likely you might find yourself saddled with more debt than normal. And as the whole world now knows, a new synonym for the word tough is COVID-19.

    With a shaky economy, millions unemployed, and a constant feeling of living in an unfamiliar world, its no shock that many Americans have turned to their credit cards for relief. Consumer credit card usage is up and most recently the experts even predict while the pandemic persists.

    The increased reliance on credit cards may also pose a need for consolidation programs during the pandemic. And if you are personally faced with an increased amount of debt, now may be the time to consider consolidating.

    If you cant consolidate, or simply dont want to, remember to practice establishing healthy credit-building habits. Make on-time payments and focus hard on chipping away at that debt. Oh, and if an extra stimulus check is thrown your way, that can help slightly lighten the load too.

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    Do Balance Transfers Hurt Your Credit

    Transferring credit balances between credit cards affects your and the average age of your credit accounts, both of which play a role in determining your credit score. The credit utilization ratio refers to the credit youve used compared to your total available credit and should ideally be 30% or lower.

    Assume you have a credit card with a of $10,000 and an outstanding balance of $3,000. Its credit utilization ratio stands at 30%. You then transfer this balance to a new card with a $5,000 credit limit, taking its credit utilization ratio to 60%. The converse holds true as well. For instance, if you transfer a $3,000 balance from a credit card with a $5,000 credit limit to a new card with a credit limit of $10,000, you can expect to see an improvement in your credit utilization ratio.

    Canceling an old credit card after a balance transfer brings down the average age of your credit accounts, especially if youve used it for a long period. Getting a new card has a similar effect too. Incidentally, both actions have the potential to lower your credit score.

    What Is Debt Consolidation And Should I Consolidate

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    Debt consolidation rolls multiple debts, typically high-interest debt such as credit card bills, into a single payment. Debt consolidation might be a good idea for you if you can get a lower interest rate. That will help you reduce your total debt and reorganize it so you can pay it off faster.

    If youre dealing with a manageable amount of debt and just want to reorganize multiple bills with different interest rates, payments and due dates, debt consolidation is a sound approach you can tackle on your own.

    Key takeaways:

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    Options For Credit Card Consolidation

    There is more than one way to consolidate credit card debtin fact, there are three basic solutions. Two are do-it-yourself and involve taking out new financing to pay off your existing credit card balances. The second takes professional help. You set up a repayment plan through a credit counseling agency. But you still owe your original creditors.

  • A consolidates credit card debt by moving your existing balances to a new balance transfer credit card. These cards offer 0% APR introductory rates on balance transfers, giving you a limited time to pay off debt interest-free.
  • With a debt consolidation loan, you take out an unsecured personal loan at a low interest rate. You use the funds from the loan to pay off your credit card balances. This leaves only the low-interest loan to repay. There is also a secured version of this where homeowners borrow against their home equity, but that can be risky.
  • A debt management program is basically a professionally-assisted debt consolidation program. You set up a repayment plan you can afford with the help of a certified credit counselor. Then they negotiate with your creditors to reduce or eliminate interest charges.
  • Identifying the best way to consolidate credit card debt out of these three options depends on your financial situation. That includes how much you owe, your credit score, and how much money you have available for monthly payments.

    The Basics: What Is Debt Consolidation

    Should you Consolidate or Settle your Debts?

    Debt consolidation means taking out one big loan to pay off many small loans.

    As the Government of Canadas Office of Consumer Affairs explains, debt consolidation loan is a loan that lets you repay your debts to all your creditors at once.

    This means that you only have one monthly payment, often at a lower interest rate than you are paying now. This saves you money on interest fees and lets you pay off your loan faster.

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