Is Credit Card Consolidation Bad For Your Credit Score
Suppose you take out a consolidation loan and pay off the outstanding balance on your credit card. Previously, you owed $3000 on Capital One and $2000 on Bank of America credit cards. Now, you borrow a consolidation loan of $5000 and pay off both the cards instantly. The credit utilization ratio on these 2 cards drops to 0 percent and that helps to pull up your credit score.
Consider Other Debt Relief Options
If you can’t afford to pay off your credit cards, consider other alternatives, like settling them on your own or with the help of a legitimate credit counseling agency or lawyer, or filing for bankruptcy. By negotiating, you might be able to get a discount on the total debt owed, arrange for more favorable payment terms , or get the creditor to remove negative information from your credit report. If you need help negotiating with creditors or debt collectors, consider talking to an accredited, nonprofit credit counseling agency or a reputable attorney rather than hiring a for-profit debt management service. With a bankruptcy, you might be able to eliminate your credit card debt.
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.
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Consolidating Credit Card Debt Could Help Simplify And Lower Your Monthly Payments As You Work To Become Debt
Consolidating credit card debt is when you combine multiple credit card balances into a single monthly payment that ideally has a lower interest rate than what youre currently paying.
But consolidating your debt takes time, and many methods require an application process to see whether youre approved first, which usually results in a hard credit inquiry that can cause your credit scores to drop a few points.
To help you decide if credit card consolidation is right for you, here are several methods to consider.
It Wont Solve Financial Problems On Its Own
Consolidating debt does not guarantee that you wont go into debt again. If you have a history of living beyond your means, you might do so again once you feel free of debt. To help avoid this, make yourself a realistic budget and stick to it. You should also start building an emergency fund that can be used to pay for financial surprises so you dont have to rely on credit cards.
Takeaway: Consolidation can help you pay debt off, but it will not eliminate the financial habits that got you into trouble in the first place, such as overspending or failing to set aside money for emergencies. You can prevent more debt from accumulating by laying the groundwork for better financial behavior.
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% Apr Offers On Credit Cards
Many credit cards offer an introductory offer of 0% APR on balance transfers for a limited amount of time after opening the card. While they still may be subject to balance transfer fees , they often offer 0% introductory periods between twelve and eighteen months to not worry about the balance accruing any additional interest.
The Citi® Diamond Preferred® Card, for example, is an excellent option for those considering taking this route. It comes with a respectable 0% intro APR for 21 months on eligible balance transfers from the date of the first transfer and 0% intro APR for 12 months on purchases from date of account opening. After that the variable APR will be 13.74% – 23.74% based on your creditworthiness. Balance transfers must be completed within 4 months of account opening. There is a balance transfer fee of either $5 or 5% of the amount of each transfer, whichever is greater The downside is being capped at the allotted credit limit given by Citi.
Keep in mind that its recommended that you have good to excellent credit if youre considering applying for a credit card that offers a 0% introductory period.
Potentially Risky Debt Consolidation Methods
When searching for the right way to consolidate debt, you might come across other riskier options. These credit card debt consolidation options could have additional drawbacks youâll want to consider before making any commitments.
1. Home Equity Loans
Home equity loans allow people to borrow money by using their home as collateral. The amount youâre able to borrow is determined in part by how much equity you have in the home. You can estimate this number by subtracting how much you owe on your mortgage from the current market value of the property.
According to the CFPB, you receive a home equity loan in a lump sum. And like a personal loan, you could use those funds to pay down other debts, including credit cards.
But a home equity loan can be risky: If you canât pay it back, you could face foreclosure on your home.
Home equity loans usually have a fixed rate, which means the rate wonât change over time. But itâs worth confirming before accepting a loan. If youâre considering a home equity loan, it also helps to examine whether there are other fees and costs that could make it more expensive than your original debt.
2. Home Equity Lines of Credit
Home equity lines of credit are similar to home equity loans. And they come with the same risk of losing your home. But home equity lines of credit, called HELOCs for short, differ in a few ways.
Itâs wise to examine and understand the details of a HELOC before accepting one.
3. Debt Settlement Companies
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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
Other Ways To Consolidate Credit Cards Into One Payment
If you owe a huge amount on several credit cards, you probably feel youre swimming in an ocean. First thing, youre worried about managing multiple bills on time. Secondly, you may also be worried about having sufficient amount to make the required payments.
The best option to get the situation under control and save money is to consolidate your credit card debt where youll make one payment every month at a low-interest rate.
If this sounds like a melodious music to your ears, then read on to know how you can consolidate credit cards into one simple monthly payment plan.
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Should You Consider Credit Card Consolidation
If you have a large amount of high-interest debt and want a simple, more streamlined way to manage your credit card payments, you may want to consider credit card consolidation via a fixed-rate, unsecured personal loan.
Understanding whether this is the right avenue for you also depends on your personal financial situation. Here are a few hypotheticals:
Have a plan to pay off your debt.
Check Your Credit Utilization Ratio
Calculate the credit utilization ratio on your credit cards. Pick the cards on which you have a high utilization ratio and list them on a piece of paper. Look at your credit card bill statements and calculate your outstanding balance. Divide this credit card balance by the credit limit. Multiply the figure by 100. The result is your credit utilization ratio.
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Why Would Someone Want To Consolidate Their Credit Card Debt
There are countless reasons why someone might have racked up an unmanageable amount of credit card debt, from irresponsible spending to unexpected expenses. When life happens, sometimes we need to turn to the easiest and most convenient form of borrowing money, our credit cards. Debt consolidation is one of the best options for those who have overused their credit cards, regardless of the reason. Here are some of the most common reasons why someone might want to consolidate their credit card debt.
- To simplify their finances by reducing the number of monthly payments they need to keep track of
- To get a lower interest rate and save money
- Because they can no longer afford to carry the debt anymore
- As an alternative to more drastic options like consumer proposal or bankruptcy
- To get out of debt quicker
Will A debt consolidation loan look bad on your credit report? for the answer.
Canadian Credit Card Debt Consolidation Loans
If your bank or credit union still holds a good relationship with you, and your credit has not yet suffered too badly, you may be able to apply for and receive a personal credit card debt consolidation loan with a low interest rate. This loan can be used to pay off all of the outstanding, high-interest, unsecured debt remaining against you. Then, you only have a single, low-interest debt remaining. Unfortunately, most banks and credit unions will require a good credit score, a verifiable income, and possibly a long-standing relationship with them. If your credit score has already been effected by your debt, this can remove a personal loan from the list of solutions. This debt consolidation loan option also has a great drawback. Althought it may seem to most to be a very quick solution to credit card debt problems, what you are doing is turning your unsecured credit card debt into a secured debt with a lien against your assets, your home or vehicles. If down the road you run into troubles financially the lender would then have the power to take your home or other property named in the lien, we have a better solution.
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Talk To A Bankruptcy Lawyer
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Equity Loans From Assets
If you own a car, motorcycle, home, RV, or boat, some lenders will let you borrow against the equity you have in those assets. You can get a loan for all or a portion of the value of your asset, and you can use your asset as collateral.
Interest rates can vary drastically. However, both the interest and loan terms are usually more friendly if you borrow against the equity in your home rather than another asset. The biggest drawback is the potential to lose your home or vehicle if you cannot repay the loan. In the right circumstances, though, this can be a great way to save on interest, as lenders see these loans as lower-risk due to the collateral.
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Warnings To Heed When You Consolidate Credit Card Debt
These are the biggest pitfalls that consumers run into when they consolidate credit card debt.
The biggest mistake people make after consolidating credit card debt is that they dont stop making new credit card charges. If youre trying to pay off debt, you need to focus on elimination. New charges just set you farther back from your goalits like two steps forward, one step back.
A Consolidated Credit client named Carol ran into this problem when she consolidated on her own using a balance transfer credit card. She used the card to consolidate her debt, but she hadnt balanced her budget. As a result, she ran up new balances quickly.
The right way: Before you consolidate, you need to set up a household budget. The goal is to cover all your bills and necessary expenses with income. This helps you avoid relying on your credit cards to cover everyday needs. If you cant cover all your daily expenses without credit, then consolidating your debt has a higher chance of failure.
For consolidation to be effective, you need to reduce or eliminate interest charges applied to your debt. Otherwise, you dont generate the cost savings you need for this to be an effective way to eliminate your balances. This means you need at least a good or excellent to qualify for do-it-yourself debt consolidation at a good, low-interest rate.
The right way: If you owe more than $30,000 or have a bad credit score, consolidating on your own can be tough. You may be better off asking for help.
Get Answers To Your Questions About Consolidating Debt
Can debt consolidation help me pay down debt faster?
Debt consolidation may help you lower your monthly payment or under certain circumstances decrease the amount of interest you pay, but this depends on your financial situation and your ability to make your monthly payments.
What kind of debt can I consolidate?
Whether you choose a loan or a balance transfer, you can consolidate credit cards, store cards and gas cards high-interest loans medical bills and more. Separately, you can also consolidate your student loan by refinancing federal and private student loans into one loan with one monthly payment.
How do I consolidate credit cards?
You can consolidate your credit card debt two ways. You can transfer your other credit card balances onto one credit card with a balance transfer, or you can get a debt consolidation loan to pay off your balances.
How much can I consolidate with a private consolidation student loan?
Subject to credit approval, you can consolidate up to the aggregate amount of your education loan debt. Maximum limits may apply. The minimum consolidation loan amount is $5,000.
If I consolidate my debt, can you pay my creditors directly?
What kind of interest rates can I get with a balance transfer?
A balance transfer offer has a low promotional or introductory rate. Rates can be as low as 0%, depending on the offers that are available to you.
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Potential Benefits Of Credit Card Consolidation
A may help you pay the debt off sooner, or at a lower interest rate, and give you emotional and financial relief.
And because with consolidation all of your debt will be combined into one new loan, youll only have to remember one payment deadline, helping to reduce the likelihood of late payments and fees.
Unlike filing for bankruptcy or defaulting, although credit card consolidation may have an initial negative effect, if you do pay off your debt you may be able to raise your credit score in the long run. It may provide you with a tangible solution to tackle your credit card debt head on.
A Real Example Of Credit Consolidation
Heres an example of how it works when you use a debt management program to consolidate. Lets say you have four credit cards.
New average interest rate : 5.73%
New monthly payment: $303
Time to pay off total balance: 4 years, 10 months
Total estimated interest charges: $2,459.65
In this example, consolidation would:
- Lower your monthly payments by $324.92
- Allow you to get out of debt six years and three months sooner
- Save you $6,453.33 in interest charges
You still pay back the full balance owed, but you do it in a more efficient way by minimizing interest . Consolidation lowers your monthly payments, the number of payments you need to make to become debt-free, and the total interest charges.
While balance transfers and debt consolidation work differently, the result is the same. You still minimize interest, combine your debts into one monthly payment, and enjoy the same benefits that you see in the example above.
If you have questions about debt consolidation or need help finding the best way to consolidate, talk to a certified credit counselor for free.
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What Is Credit Card Refinancing With A Personal Loan
Alternatively, you can take out a personal loan to pay off the credit card balance.
This is worth it if you have a good score and can qualify for low-interest credit. That way, your monthly payments will be smaller.
But there are a few things to keep in mind when you refinance your credit card debt.
First, your credit score will decrease temporarily. Granted, itll bounce back quickly if you pay on time. But you wont be able to open new accounts for a while.
Second, you will likely be repaying your debt for much longer with a loan than with a credit card.
Thats how installment credit worksthe payments and term length are fixed. If you get a loan for ten years, thats how long itll take you to repay it. Changing the terms is not that easy.
With , on the other hand, payments are flexible. If you make larger payments occasionally, you might pay it off faster.