It’s not easy to feel overwhelmed by credit card debt. Maybe you’re having trouble keeping up with your monthly payment minimums, or maybe you just don’t see how you’ll ever get out from underneath that massive pile of debt.
If you’re worried about your accounts being sent to collections or you just need help putting a repayment plan in place, consolidating your credit card debt may be an effective solution for your problems.
The type of debt consolidation program you select depends on a number of factors, including how much debt you have, what your current interest rates are, and how close you are to defaulting on your accounts.
To get you started, we’ve pulled together some of the most popular methods for consolidating credit card debt, along with explanations of how they work and who they can benefit.
Table of Contents
1. Research Current Balance Transfer Deals
If you’re within striking distance of paying off the bulk of your credit card debt, you might want to consider consolidating your various balances onto a single credit card.
Many credit card companies offer low introductory APRs if you transfer balances from other cards and sometimes you might even find a 0% APR deal!
This approach is great if you can find a lower rate than what you’re paying on your other cards because you’ll save loads of money on interest payments. It’s also convenient because you only have to worry about making one payment each month instead of trying to remember several different due dates.
There are a couple of things to be aware of when considering a balance transfer for credit card debt consolidation. One catch is that after a predetermined amount of time (typically somewhere between 12 and 18 months), your APR increases, and sometimes that jump can be huge.
You will want to pay off the full amount of your debt by the time that introductory rate expires. Otherwise, you might end up paying even more money in interest than if you had simply paid each balance separately each month.
Compare your current interest rates to the ongoing interest rate you’ll receive after the introductory period is over to help you decide if this is a good move for you.
Another important factor to consider when analyzing a balance transfer offer is the balance transfer fee. Even if the APR is 0% for the introductory period, the credit card company might charge you a 3-5% fee for the service of transferring your existing balances.
That number greatly affects the true cost of using this option. Again, it might still save you money to consolidate this way, but you do have to look at your own finances to know for sure.
2. Pay Off Debt with a Low-Interest Personal Loan
Another option to consolidate your credit card debt is to pay off your various creditors with a single debt consolidation loan. Just like a balance transfer, the goal here is to pay off your credit cards and save money by getting a lower interest rate.
Ideally, you could then put that extra savings towards additional payments and get out of debt even faster. You can apply for debt consolidation loans through financial institutions such as a bank, credit union, or online lender.
Traditional banks, credit unions, and even online lenders typically have higher lending standards, such as a certain credit score minimum. Another benefit to this option is that you can spread your repayment term over several years, which can help you manage your monthly payments more easily.
On the flip side, you’ll be paying interest for longer a period. But if you can get a low rate and avoid going into default, the longer term might be an advantage for you.
Online peer-to-peer lenders offer a variety of options for borrowers, particularly those with lower credit scores. Part of your application includes categorizing your loan with a risk rating. Here’s where the peer-to-peer process differs from a regular loan.
Individual investors (peers) finance your loan and profit from the interest you’re charged — just like a regular bank would. And just like a regular bank, your interest rate is determined on your perceived risk to repay the loan, so the lower your credit score, the higher your rate will be.
The key difference here is that many investors prefer to finance higher risk loans because they’ll make more money off successful transactions. So you might have better luck getting your loan funded with a P2P lender than with traditional financial institution.
Like always, you’ll need to perform a rate comparison to see if it’s worth paying off your credit cards with a debt consolidation loan.
3. Consolidate with a Debt Management Plan
Many organizations offer debt management services to individuals who not only have extensive credit card debt but are struggling to keep up with high-interest payments.
A debt management company works with your creditors to reach an agreement upfront so that you won’t be charged late fees or have your account sent to collections while you repay.
They can also often lower your interest rate so that more of your monthly payments go towards your amount owed rather than interest, which gets you out of debt faster.
Most debt management plans take between three and five years to complete. Another major component of this type of plan is that most, if not all of your credit cards, will be closed during your repayment period, so you won’t have any access to credit.
This can affect your credit score during the repayment period because of your low credit utilization ratio. However, overall, a debt management plan is good for your credit score. You’ll also need to make sure you can live within your means during this time because you won’t be able to charge any emergency expenses.
It’s important to note that when looking at companies to work with, debt management and debt settlement are not the same thing; in fact, there is a huge difference between the two.
Unlike the monthly payments associated with debt management, debt settlement usually focuses on lump-sum payments that are less than what you owe.
Does debt consolidation affect your credit?
How your credit is affected depends on the way you consolidate your debt. Some methods may hurt your credit, while others may actually help.
For instance, if you pay off credit card debt with an installment loan, you might actually see a bump in your credit score because installment loans are more favorable than revolving credit.
On the other hand, if you open a new credit card to transfer your debt and take advantage of a better rate, you might see a slight dip because the new account lowers your overall credit age.
That doesn’t automatically mean it’s not a good decision, it’s just an important factor to consider before you pick what to do.
Debt management doesn’t affect your credit score long-term in a negative way and can actually help your score because your creditor reports your debt as being “paid as agreed.”
Debt settlement, on the other hand, is reported as a negative item, either as being a “partial payment plan” or a “settlement accepted by creditor.” Use caution when evaluating your options so that you find a plan that works for you in both the near-term and the long-term.
Is it a good idea to consolidate your debt?
If you’re feeling overwhelmed by your monthly debt payments, it’s definitely time to explore your debt consolidation options. But even if you can keep up with your payments, you could benefit financially from a better interest rate, whether through a new credit card or a debt consolidation loan.
No matter what your debt situation is, look at the holistic picture before making up your mind. Don’t look at monthly payment amount alone; after all, it might end up costing you more in the long run if the repayment period is longer.
To help make the best decision, consider reaching out to a free or low-cost credit counselor. They can help review your finances and your options to figure out the best debt relief plan.
With little to no obligation, it’s a low-risk way to get a second opinion and make sure you’re not missing any fine print. You can also ask about the potential impact on your credit so you can access the best financial products in the future by having a good credit score.
Ensure You Qualify for Consolidation
No matter what avenue you select for consolidating your credit card debt, you first need to make sure you have all your records in order so that you can qualify for your chosen program.
Start by requesting copies of your three credit reports which you can do for free once every twelve months. Then it’s time to scour each line to make sure all of your information is accurate and up-to-date.
Be sure to check both the financial information as well as personal information like your birth date. Small inconsistencies can have large effects on your credit score, which may deter a lender or debt management program from working with you.
It can also make it more difficult to qualify for credit cards with good interest rates and low introductory balance transfer offers.
Once you’ve selected a debt consolidation product pay careful attention to your credit score both during and after the process. A professional credit repair company can ensure your debt repayment plan is accurately reflected on your credit report.
We recommend Lexington Law Firm as a reputable company with a proven track record in helping individuals get their credit score back on track, even after consolidating credit card debt.
Read our review of them and consider giving them a call. You’ll feel great knowing that you can achieve your financial goals with little to no debt and a credit score that is on the rebound.