In theory, consolidating credit card debt sounds like a good idea. Replacing high-interest credit card debt with a credit product that has a lower interest rate could help reduce the amount of interest you ultimately pay on the debt.
There are a number of ways to consolidate credit card debt — all of them with their pluses and minuses.
Some choices are better than others. But the goal of all of them is basically the same: to combine your high-interest debt, leaving you with one monthly payment at a more reasonable rate.
If you’re considering consolidating your debt, it’s important that you find the option that works best for you and offers you the lowest-cost way to get out of debt.
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.
How does consolidating credit card debt work?
Because consolidating your credit card debt means taking out a new credit product, you’ll need to apply for one. Here's how it works:
- Shop around and compare lenders. Talk to your current bank or credit union, or research lenders online. Most financial institutions will have several options that could work for you, including balance transfer credit cards or personal loans. Not everyone will qualify for a debt consolidation loan. You may need a good to excellent credit score to be eligible for some options, or to receive the best interest rates.
- Pay off your old credit cards. If you qualify for a new debt consolidation loan, you’ll use the money you receive to pay off your previous credit card balances or transfer your balances onto your new credit card. In some cases, your bank may send you checks you can use to pay off your current balances. That leaves you with just the new loan and the new monthly payment.
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. Don’t forget to factor in the fees and other costs of your new loan.
- Can you control spending? If you’ve accumulated debt because you’re 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.
How does consolidating credit card debt affect your credit?
Debt consolidation’s 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 you’re pushing your credit limit.
You may consider working with a nonprofit credit counselor to help weigh your options and how they’ll affect your credit in the long-term. They can also help you learn ways to avoid credit problems in the future.
SOURCE: FOXNEWS IMAGE SOURCE: PIXABAY
