Is Credit Card Debt Consolidation Good for You? Find Out
You may have to consider credit card debt consolidation if you are being encumbered with the problem of having to pay different credit card debts every month. It is not a gainsaying that the interest rates on credit cards are very high when compared with personal loans or mortgage loans. Managing different credit cards, especially when you need to be making payments on them at different dates every month, may not be that easy. If care is not taken, you can easily forget the payment date of a card except you set payment alerts for all the cards.
What is credit card debt consolidation?
It simply means taking one loan or opening one credit account to pay off your other credit card balances. For example, if you are having five different credit cards with balances to pay, you can just take one loan and use the proceeds to pay off the existing card balances. So, instead of making five payments every month, you will only need to be making single payment. This makes the administration of the debt to become easier.
People consolidate their credit card debts for different reasons. But before you rush into it, it is very important that you assess the move carefully so that it won’t be like a case of jumping from frying pan into the fire. You should only consider credit card debt consolidation if it will help you achieve the following:
Less interest: There is no doubt that interest rates on credit cards are usually high. So, if you are considering credit card debt consolidation, it should help you reduce your interest rate before you can say it is really worth the effort. But your focus may not just be on the interest. Many credit card will charge you balance transfer fee which is usually 3% of the debts you are transferring. If the fee is going to be more than the interest you are trying to save, consolidation of the credit card debts will not be justifiable.
Read Also: Interest Rates: How to get low interest rates on any loan
One monthly payment: Possibly you usually struggle to make different card payments at different dates in the month. With credit card debt consolidation, you will only need to be making one payment for the debts you are consolidating into one.
Better term. If you have liquidity payment which may make it difficult to meet up with your monthly payments when due, you can consolidate your credit card debts into one which will allow you to pay off the loan over a longer repayment term. Longer repayment term means reduced monthly payment. This can help you ensure that you don’t miss payment.
Lower credit utilization: Credit card balances are revolving debts. Such debts are considered when calculating your credit utilization ratio. If your credit utilization ratio is already above thirty per cent, it will be considered too high. And this can affect your credit score. Consolidating your credit card debts into a personal loan can help you lower your credit utilization and this can translate to an improved credit score.
How to Consolidate Credit Card Debt
If you know that credit card debt consolidation will help you achieve your objective, the next thing is to think of the best way to go about it. There are different ways you can adopt to consolidate your credit card debts. Each of them has its own advantages and disadvantages and we shall discuss them below.
Read Also: Instalment Loans and Payday Loans compared
Approach non-profit credit counseling organization: You may seek the advice or services of reputable counseling organization that are accredited by National Foundation for Credit Counseling (NFCC). They are professionals in debt management. They can help you negotiate better terms with your credit card providers. If this works out, it is the organization that will take up the management of your credit card debts. You will only have to issue a single cheque to the organization every month. It is the responsibility of the organization to help you allocate the payment and pay your card providers at the end of every month. However, they will charge you small fee for their services.
Get Balance Transfer Card: You can get balance transfer card that offers 0% intro APR for a considerable length of time. This can save you the interest payment. You will only need to focus on the payment of the principal. Also it can help you quickly pay off your credit card debt thereby lowering your credit utilization. Nevertheless, you shouldn’t forget that you may be asked to pay balance transfer fee. Therefore, you may need to compare the interest you will save with the fee you are going to pay. Besides, it is important that you are sure that you will be able to pay off the entire card balance before the 0% intro APR offer expires. Interest rate after the expiration of the 0% intro APR offer is usually very high. It is better not to charge any new credit against the card. If you plan to use the card for new purchase, you should find out whether the 0% intro APR offer also applies to new purchases. You need a good credit score before you can be eligible for balance transfer card.
Take Personal Loan: If you are not sure that you will be able to pay your card balance within the 0% intro APR offer with balance transfer card, personal loan may be your next consideration. Interest rate on personal loan is lower than that of credit cards. With personal loan, you will have longer time to pay off the loan. But you will need a good credit score to get the loan at a good interest rate. Without a good credit score, you may not even be eligible for the loan. Before you settle for personal loan, you should not forget that some lenders will most likely charge origination fee.
Borrow from a friend and relative: If you have a friend or relation that can borrow you the money, this may be the cheapest way for consolidating your credit card debts. At the same time, it can be very risky. If you fail to meet your obligation, it can strain the relationship. Except you are very sure that you won’t have problem paying back the money, it may be better not to try this option at all. The consequences of not being able to pay may be difficult to manage.
Borrow from your retirement account: If you contribute to a reputable retirement account such as 401(k) or an IRA, and you have been paying your monthly contribution consistently, you can borrow from such fund. But if your credit card debts are too much, you may not be able to raise enough money through this method. You can only borrow up to 50% of your retirement account balance. Also, you will need to pay back the money within five years.
Read Also: Important Facts about Debt Consolidation Loan
Take advantage of your home equity: If you have built sufficient equity on your home, you can take home equity line of credit (HELOC). The interest rate on HELOC is considerably low because the loan is secured on your home. Lenders usually consider secured loans less risky, hence the lower interest rate they offer on such loans. But this is very risky to the borrowers. If you are unable to pay the loan, you stand the risk of losing your home. Except you are very sure that paying back the loan will not pose a challenge, it may be better not to take this route towards credit card debt consolidation.