There comes a point in life for most people when they feel overwhelmed by credit card debt. No one ever wishes debt on themselves, and it comes as a natural human desire to want to get out of debt. Chances are good you’re reading this post because you are struggling with credit card debt and looking for a way to free yourself from it. In that case, you are on the right path towards redeeming yourself from debt because you have taken the first step which involves finding the right information about dealing with it. Consolidation is by far one of the best ways to deal with debt, but have you ever wondered how to consolidate credit card debt in a way that will actually help? Consolidation is like a double edged sword, done properly it’s a great thing, done improperly and it can potentially destroy your credit score.
Debt is a nightmare to most people, especially when you consider the current financial climate. You may find yourself needing help in creating a repayment plan, being unable to keep up with monthly payments, or living in fear of your accounts being sent to collections. In such instances, you should consider consolidating your credit card debt. Such factors include how much you owe in credit card debt, current interest rates, and your proximity to defaulting on your credit card accounts.
Consolidation can be a scary word, but it’s not as scary as it sounds! There are actually a few different ways to consolidate your credit cards, below we will talk about the most popular methods.
Balance Transfer Deals
If you owe a lot of money on multiple credit cards, you might want to start considering consolidating your balances onto a single credit card account. There are companies that offer low introductory APR to customers who transfer balances from other cards and at times you might find a credit card company that is offering you a 0% APR deal. Balance transfer deals hold value if you find a consolidation deal that offers you a lower rate of interest than the rate you are currently paying on your other credit cards. When you land a good deal, you not only save on interest payments, but you also get to pay a single monthly payment which takes away the stress of trying to keep up with some due dates
It’s important to keep in mind that after a preset period ( usually between twelve and eighteen months), your APR is set to increase and sometimes it escalates by a huge margin. You should therefore first determine whether you are going to be able to clear your credit card debt before the introductory period expires. If the expiry of the introductory rate catches up with you before you finish paying off all your credit card debt, you might end up paying more than you would have paid if you stuck with and paid off the multiple credit card balances you had originally. Always compare the ongoing interest rate you’ll get after the expiry of the introductory interest rate with your current interest rate.
Another important element to consider before choosing a balance transfer deal is the actual balance transfer fee involved. You might find that a creditor is offering you a 0% APR valid for the introductory period, but the same company might demand a 3% to 5% fee as the charge fee for transferring your balances. The fee in this case greatly increases the cost of using this method of consolidation. Look out for the indirect costs that might lead to losses and avoid them. You should go for a balance transfer deal that is very transparent and one that does not charge large fees.
If you find the right deal, a balance transfer can be an efficient approach for consolidating and eventually settling your credit card debt.
Take Out a Low-Interest Loan to Pay off Debt
Another viable option that you can use to consolidate your credit card debt is to pay off the debt with a single debt consolidation loan. The aim, in this case, is to clear your credit card debt and save money as a result of a low-interest rate from the loan. You may also decide to put the money that you save from a low-interest rate towards additional payments to help clear your debt sooner.
You can get debt consolidation from credit unions, banks, online lenders, and other financial institutions that have the capacity to give out this type of a loan. It is worth mentioning that most banks, credit unions, and even some online lenders demand that you have a certain minimum credit score to qualify for this type of loan. You need to know your credit score before you apply for a loan to avoid wasting time applying for a loan from a lender whose minimum requirements and standards exceed your qualifications.
Another advantage of taking a debt consolidation loan to pay off your credit card debt is that you can choose to spread your repayment term over the span of several years, and this helps reduce the amount you have to pay in monthly installments. The process results in reduced stress and it also makes it much easier to manage your finances.
Paying interest for an increased period of time comes as a disadvantage using this approach. Still, this option is better than having your accounts sent to collections or going into default because you are unable to keep up with several monthly repayments for different credit card accounts.
If you credit score has suffered in the past and as a result you do not currently qualify for a loan, online peer to peer lenders offers several variations of loans for borrowers who suffer a low credit score. The application process usually includes categorizing your loan based on a risk rating. In this setup, individual investors are the peers who finance your loan, and they get a share of profit from the interest charged on your loan. The amount of interest on your loan depends on the amount of perceived risk associated with an individual borrower. In other words, if they vet you and find that it’s not too risky to lend you money, they will provide a loan for you at a much lower interest rate. If you have a very low credit score, then they charge a higher interest rate on your loan.
Surprisingly, most people who finance peer to peer loans prefer to give preference to high-risk loans because high-risk loans have higher interest rates which mean that the investors make more money from successful transactions.
Debt Management Plan Option
Several financial organizations sell debt management services to individuals who are having trouble keeping up with escalated interest rates and multiple monthly payments. A debt management entity collaborates with your current lenders to reach an agreement upfront whereby the creditors agree that they will not charge you late fees or send your account to collections while you continue to repay your debt. At times, the creditors may agree to lower your interest rate to enable you to repay your debt faster.
On average, successful debt management programs take 3-5 years to complete, depending on the amount owed. This approach of credit card debt consolidation has a unique advantage in that you lose user access to all your credit cards during the repayment period. The lack of access to credit cards keeps you from nullifying your efforts of getting out of debt by keeping you from accruing more debt. On the flip side, there is the concern that this unique feature might lower your credit score as a result of low credit utilization ratio. However, the approach does more good than harm because it helps you get out of debt sooner.
When looking for companies that help individuals deal with debt you should keep in mind the fact that debt settlement and debt management companies are two different types of entities that operate under different principles. Debt management companies focus on monthly payments whereas debt settlement companies focus more on reducing the total amount of loan plus interest that individuals have to pay. Debt management usually helps improve your credit score because the creditor reports that you have been faithfully paying the debt as agreed. Debt settlement is at times reported as a negative item if you present a partial payment plan to your creditor, or if the creditor accepts a settlement offer.
Make Sure You Are Prepared
It does not matter what route you take towards consolidating your credit card debt; you must start by ensuring that you have everything set (including the necessary documents) for you to qualify for a consolidation plan. You should start your preparations by acquiring three copies of your credit report which you can obtain from AnnualCreditreport.com for free. Check your credit score to ensure that there are no errors in the report and that the report is up-to-date. Be thorough when analyzing your credit score and other documents because even the smallest details could cause trouble and unnecessary inconvenience.
After you have chosen a consolidation plan, always keep your credit score in check throughout the entire duration of the plan. If possible, it would be best to use the first method of transferring your current debt to a new company that offers better interest rates, then you will only have a single payment to make and the interest will be lower.