Credit Card Consolidation: Everything You Need to Know
No matter what the purchase, credit card has been widely accepted for most transactions. Before, its use was associated with being poor and irresponsible. However, the opposite rings true today.
For you to get your application approved for a credit card, you have to meet certain standards. Thus, it creates the illusion of exclusivity, so it is now regarded as a status symbol. The same goes, with a much bigger impression in fact, if you were simply sent a credit card.
In essence, what a credit card does is extend your purchasing power, but with certain limitations and consequences. For one, your credit limit determines how deeper your pockets become even if just for a while. Moreover, aside from the actual value you consumed for purchases, you will have to pay the interests as well.
However, having deeper pockets is but an illusion, something that many forget. They end up borrowing and spending money they do not have. Especially when you are using multiple credit cards, it can be overwhelming.
Fortunately, there are many solutions that one can take in order to “get rid” of credit card debt. When paying the balance in full is out of the question, one of the most popular options is credit card consolidation.
What Is Credit Card Consolidation?
If you are in deep in with your credit card debt, your credit card rating will surely take dip as well. In order to avoid this situation, one can look into credit card consolidation. It has been proven to be an effective way to avoid the repercussions of bad credit such as lower credit rating as well as high interest rates.
Credit card consolidation is a great way to solve your bad credit. Basically, all your balances are transferred into one account so you only have to pay one creditor instead of many. It should be noted that this not necessarily an easy way out. One would still to settle payments on a regular basis. However, if you have a hard time keeping track of your budget or simply have a lot on your plate, this is a good way to simplify things.
There can be a lot of complications with debt. Before deciding on credit card consolidation, you should know everything there is in it. After reading this page, you should be able to answer the following:
- Is credit card consolidation the best option for you?
- What is the implication of consolidating credit card debts?
- Are the implications manageable, given my financial situation?
- What is the best way to consolidate credit card debt?
- Where do I find the best credit card consolidation companies?
What does it mean to consolidate credit card debts?
The main feature of credit card consolidation debt is it combines all your debts from multiple creditors into one. Usually, they have different deadlines so this means that you only have to deal with one until the life of the loan.
So, what exactly does credit card consolidation mean? This type of debt combines your multiple credit card accounts into one. Instead of paying off different accounts on various due dates, you only have to monitor one payment.
Credit card consolidation is not necessarily a way to better your financial position or a get out of jail free card. However, there are still ways that you can use it to your advantage. First, you can go for a lower monthly payment so your debt becomes more manageable. This is a great option for people who cannot stretch their monthly budget, but still want to control their credit card debt. However, this does not come without a consequence. Lower payments mean that you will incur interests for a long time.
Therefore, if the budget allows it, it is still better to take a shorter payment terms with higher monthly payment. All things held constant, this would be the case. Unfortunately, certain factors such as assets and current credit rating should be put in consideration.
What does consolidating your credit card debt do?
Before we even discuss it as one of your options, you must first understand what it means to have your credit card debt consolidated. Below are three of the most basic functions and benefits of this solution:
It lowers what you pay in interests
With high interest rates in credit cards, it becomes nearly impossible to get out of your debt. The interest is compounded every month. After some time, the principal will be paid off yet you still have to deal with the accrued interests.
This can be very frustrating, especially with all the other bills piling up. Consolidating this debt is a way to redeem yourself. Credit card companies will stop charging you in interests. Instead, it will be only at lower as indicated by your creditor. Low interest rates allow to settle the balance completely in a shorter period of time. With responsible spending, you will be able to get back to your feet.
It incentivizes aggressive payment
If you want to aggressively pay off your debts. Since you are paying more of the principal debt, this is a great way to be aggressive in dealing with your credit situation. The more you pay towards the principal balance, the faster you can get out of debt. It will shorten your payment period and that can help you save money on the interest amount that you will pay on the loan as a whole.
It simplifies the payments
One of the biggest frustrations there is when it comes to paying your bills is dealing with a lot of them. This results to missing deadlines and incurring exorbitant fees in interests. By opting debt consolidation, you would only have to settle one debt payment per month, no matter how far apart the deadlines are from your different creditors. Simplifying the process means avoiding any kind of confusion, and relieves you of stress.
Some misconceptions when it comes to credit card debt consolidation
True, there are many legitimate reasons for you to have your credit card debt consolidated. However, to avoid any confusion, we will also talk about what debt consolidation is not.True, there are many legitimate reasons for you to have your credit card debt consolidated. However, to avoid any confusion, we will also talk about what debt consolidation is not.
1. It does NOT magically wipe your debt
Instead, it simply transfers your multiple credit card debts into one account. Some people mistake this for having the slate completely clean. While this is a chance for you to repair your credit rating at a more manageable interest rate, it does not mean you should use your credit cards again. Remember, you still have a debt which needs to be repaid, and cracking up your cards once again will definitely do more harm than good.
2. It does NOT repair you credit rating
In and of itself, even the best credit card consolidation companies cannot bring your credit rating up. They only present an opportunity for you to do so through easier payment terms and relatively lower interest rates. However, it is still up to you what to do with this chance. If you fail to make some lifestyle changes and keep up with the payments, your rating would sink even lower. Worse, you may have to give up your collateral.
Determining the Best Way to Consolidate Credit Card Debt: What Are the Factors Involved?
Have you decided that credit card consolidation is the best for you? You have a number of options which we will get into later. For now, let us look at the factors which you should look into before going to a creditor.
Your current credit card debt
Relatively low credit card debt may not require a long-term loan. This is the first and the most important factor in determining the best way to consolidate your credit cards. However, for the opposite, you may need a long-term loan.
Your monthly budget
Some people can afford to get a part-time job or freelance gigs when faced with financial troubles. In essence, this stretches your monthly budget. However, because perhaps of other obligations, this is not an option that everyone has. These people who cannot augment their income would more probably be unable to afford higher payment terms.
Valuable assets in your estate
People who have a home or car which they can put up as collateral are in better position to haggle a higher credit for their debt consolidation. However, others who do not have anything to secure their debt may not be lent a big amount.
Sensitivity to interest rates
Some people feel cheated, having to pay a large sum in interests alone. If you want to maximize what will go the principal amount, you will have options that usually have low interest rates.
People with high credit rating are more likely to get better “deals” when settling into an agreement with the creditor. If you have a good credit rating, your options would definitely be wider so you can opt something that you can use to your advantage.
What are the best credit card consolidation loans?
There is no single best way to consolidate credit card debt. Knowing what the factors involved are, these should help you decide on a solution based on your financial condition.
Best for people with no assets, high to moderate credit rating, moderate sensitivity to interest rates, and/or relatively stretchable monthly budget.
While it is not made to pay off credit card debts exclusively, you may still use it for such purpose. However, it does not consolidate your debts in the strictest terms.
As you can technically use the money for whatever purpose, you will still have to pay each of your creditors separately. Like the first two options you have, it is not secured so do not expect very low interest rates. Thus, while you have no asset to lose, this may do more good than harm if not utilized properly.
Estimated Personal Loan offers for $10,000 (3 years)
Personal Loans for Credit Card Debt Consolidation
Debt consolidation loan
Best for people with no valuable assets, limited monthly budget, high sensitivity to interest rates, and/or high credit card debt.
Similar to balance transfer cards, this financial product is especially for people who want to consolidate their credit card debts. It is a type of unsecured loan, meaning there is no collateral that you have to put up. The funds you loan here are for your debts alone, and chances are you would not see it in cash.
What the lender does here is pay all your debts to different credit card companies so you will only have to pay one creditor. Not only does it simplify the process, you may end up paying lower interests as well.
Balance transfer cards
Best for people with relatively low credit card debt, high to moderate credit rating and/or no valuable assets.
Here, you take the balance form one of your creditors and transfer it to a new credit card. Even before it starts to accrue interest, you will already pay a fee for the service which is usually 3% of your total balance.
As their clients are already in debt, they use very low or even zero interest rates to attract them. While this is only an introductory rate, you can still take advantage of it by paying a lot at the beginning of the loan. Thus, when this introductory rate expires, a smaller balance would incur interests.
Before deciding on balance transfer cards, remember that the best credit card to consolidate debt is transparent and offers reasonable interest rates in relation to your credit score.
Home equity loan
Best for people with assets, low credit rating, high sensitivity to interest rates, high credit card debt, and/or non-stretchable monthly budget.
Unlike the first three options, this is a secured debt. Here, you put the equity you have in your house as a collateral so you will usually get a low interest rate.
The interest accumulates quicker in credit cards, so if are certain you will not be able to settle it in the immediate future, home equity loan is a good way to get everything paid. However, make sure that you will be able to pay this back. Else, you might lose your home.
Debt management plan
Best for people with low credit rating, no assets, moderate to low sensitivity to interest rate, high credit card debt, and non-stretchable monthly budget.
If you feel clueless about how to go with your credit card debt, this is your best bet. Here, you will have a credit counselor who will negotiate with the creditors in your place until a payment plan agreement is reached.
Instead of going to each of the lenders of creditors, you will submit the payment to your credit counselor who will be in charge of disbursing the debt. This simplifies the process, helping you keep up with payments without all the hassle.
How can you start the process of consolidating your credit card debts?
If you have decided that credit card debt consolidation is the best for you, do not wait for the interests to compound again. Start now! Here is an action plan you can follow to guide you every step of the way.
Identify and understand your credit card debts
More importantly, focus on the interest rate and fees that you pay on each statement. As you will see later on in the process, these have an effect on what your creditor will offer you in then new consolidation plan. Strategizing helps you get the most out of the advantages and the least if none at all of the disadvantages. For example, debts on your new credit cards may not need to be consolidated, especially if you can afford to pay them back right away.
Check your financial health
The most important question here is, “how much can you afford to pay?” The last thing you want is get into a payment plan you cannot sustain. Track your expenses and compare it with your income flow. This is the simplest way to calculate how much you can allot for debt payments.
If you want this to save a little more for debt consolidation, you can always minimize unnecessary expenses such as night outs and movies. Virtually unnoticed because of how they minimal they seem compared to your budget, these can easily add up if you do not monitor your spending. More importantly, in checking your financial health, do not just look at the now. Expect tragedies or other emergencies, and take those into consideration.
Research your options
Given that you have already researched your other options such as bankruptcy, you must already know where you stand financially by the end of step two based on the five factors mentioned above.
Within each type of debt consolidation that you can choose from mentioned in this article, we have put our generalized yet informed opinion on for whom it works best for. However, in the end, you know best what would alleviate your credit card burden the most.
Decide on a debt consolidation plan
Based on your own research and the different factors above, what is the best plan for you? You may have an option you have already zeroed in before you started your research. This may change now that you have more information.
Remember to look at this objectively, and not be swayed by your own biases. Perhaps you just want to get this over with and start a clean financial slate yet again. So, you decided on a short-term loan with higher monthly payments that you cannot afford. If the result of your research goes against your gut, go with what is more logical.
Be diligent in paying back your credit card consolidation loan
Once the ink has dried on your contract, you officially have the opportunity to make things right. Before anything else, you can start by making your payments on time. Soon enough, you’ll be free from your debts. Depending on your income flow, you might need to cut back on some expenses.
How can you make credit card consolidation work?
As you probably are aware, there is a lot of commitment needed in committing to a payment plan. It requires sacrifice and discipline. Below are some of the things you can do to avoid falling behind on your monthly payments.
1. Set a budget plan
No matter what your financial situation is, it is important to allot a certain realistic amount to each expense. Much more when you are paying debts, a budget plan can determine whether you will be able to meet the payment deadlines or not. Consider committing to this budget a full-time job.
2. Do not get a loan of any kind
There are times that you would not be able to avoid taking out a loan, most of which are unfortunate incidents. However, unless there really is a need for you to borrow money, don’t. As someone already getting one’s debt consolidated knows, it is another trap that you could possibly get trapped in.
3. Mind your spending habits
Do you easily get enticed by a sales talk or by discount promos? If you want to make sure all bills are paid by the end of the month, this is something that you should avoid. Before buying anything, ask yourself, “can you live without it?” If you can, drop the item and avoid the bill. Easy, right?
4. Increase your cash flow
If you do not want to live on such limited budget, you can easily solve that by getting a part-time job or a gig. The internet has made it easier than ever to connect with people interested with what you have to offer. Any additional income, no matter how minimal compared to your salary, can help you pay those payments without giving up much of your lifestyle.
5. Set aside some money for emergencies
Start an emergency fund. As is its nature, it should not come very soon so even the smallest amount could make a difference. The key here is consistency. After some time, this could amount to a substantial sum. Even if you keep up with your payments, even one small emergency can ruin you. You, then, would be left with no choice but to borrow again and be trapped in a never-ending cycle of debt.
You have to remember that the end goal here, no matter how big or small your debt is, is to get out of it for good. When you have lots of credit card debts, credit card consolidation can help you back up your feet. In the end, even if you know the best way to consolidate credit card debt, it still largely depends on what you decide to do.