A credit card debt consolidation loan seems like a good idea when you are struggling to pay off your multiple credit card accounts. In our society, the use of credit cards is the norm. We practically use it to pay for everything. The convenience of a cashless transaction makes it a tempting purchasing tool to use. Since it gives our spending power a boost, it is no wonder that a lot of people have come to abuse it.
Paying off one credit card debt is usually not a problem. But if you have a lot of high-interest credit cards, that can quickly start to overwhelm your finances. These cards are notorious for having very high-interest rates. You need to pay this off on top of the actual price of your purchase. As long as you carry over a balance to the next month, the high-interest will continue to accrue and make your debt grow each month.
This is probably why a lot of people consider using a debt consolidation loan to pay off their multiple credit card accounts. The idea is to borrow a loan that is big enough to cover the total credit card debt that you owe. Once the loan is approved, the fund will be used to pay each creditor. You will then be left with one loan to pay each month.
It is very important for you to remember that credit card debt consolidation does not end your debt troubles. It only simplified your payment scheme so you end up with one monthly payment instead of several credit card dues. Your repayment has yet to start. So do not feel too complacent about your debt situation – at least, not yet.
What are your credit card debt consolidation loan options?
Before you consolidate your credit card debts, it is important to understand the different options that you have. While all of them are effective, there is usually a specific type of loan that suits your unique debt and financial situation. Make sure that you do not focus on your income. You have to consider other things like your financial goals and monthly expenses. This will help you make the right choice among your debt consolidation loan options.
Having mentioned that, here are the three types of loans that you can borrow to consolidate your credit card debt.
Debt consolidation loan. This is an unsecured loan that you will borrow to specifically consolidate debts. It does not have to be limited to credit card debt. You can also use it to consolidate even your other debts. What sets this type of loan apart is the fact that the lender will take charge of paying off your multiple credit accounts. After the approval, they will directly coordinate with your original creditors and lenders. Of course, all the details will come from you and you will be informed of all the transactions. But the loan will usually not pass through your hands. Ideally, you want to get the loan with the lowest terms. But you should also consider the other terms of the loan to really be sure that you will save money.
Personal loan. This is another unsecured loan that is oftentimes confused with debt consolidation loan. The truth is, they are the same in the sense that they are both unsecured loans. However, personal loans can be used on other things and not just for consolidating credit card debt. If you borrowed $10,000, you have the freedom to use half of that amount on something else. But if you choose to use it to consolidate debt, you will be in charged of paying off your original creditors and lenders. This option requires the borrower to have enough self-control and discipline so they will not spend the loan on an unnecessary expense. It can be quite tempting to use it on an unplanned vacation but you are encouraged to control yourself and proceed with the plan of consolidating your debts.
Home equity loan. This option will utilize the equity that you have in your home. Since you will use your house as a collateral, this will be considered a secured loan. You can expect a lower interest rate on this. Of course, it is important for you to use this loan as intended to avoid wasting the risk that you are putting your home through. If you fail to pay this loan back or if you are irresponsible with the payments, you might end up losing your home and still owe a lot of money. Like a personal loan, you are usually in charge of paying off your original creditors and lenders.
What to consider before borrowing a debt consolidation loan?
Now that you know the credit card debt consolidation loan options, you need to know how you can choose wisely between them. There are a couple of considerations to think about.
Your creditor. Start with the original creditor. Try to talk to the first. If they can help you lower your interest rate, then you may not need to consolidate debts. If you can move the due dates of all your credit cards under one date, that would also make things easier. Sometimes, it is possible to negotiate your existing debts so it becomes easier to pay off.
Your credit score. Another consideration is your credit score. Obviously, borrowing a loan would mean you should have a good credit score in order to enjoy the best interest rates or payment terms. If you do not have this, you may be asked to look for a co-signer. While a bad credit score will give you a higher interest rate, it may still be lower than the average rate of a credit card. Calculate where you can save more before you decide.
Your income. All lenders will be concerned about your income so you need to consider this as well. After all, they want to see proof that you can afford to pay them back. If you cannot show that you have a stable source of income, even your good credit score may not help you get approval. In case you do not have a steady income, this might not be the best option for you to get rid of credit card debt.
Your budget. Obviously, you need to look at your budget because this is how you can calculate your debt payment fund. While paying off your credit cards in important, you should not forget that you have other expenses too. Your budget plan will help you identify what these are. It is important to list the important financial obligations that you also need to meet so you will not forget about them.
Your interest rate. Finally, you have to look at the average interest rate on your credit cards. You want to make sure that the interest of the debt consolidation loan will be lower than what you already have. The lower it is, the better. This will not only help you save money on the whole loan payment. It will also help you pay off the debt more aggressively – at least if you continue paying the same amount each month. The low-interest rate on the loan would mean a bigger percent of your debt payment will go to the principal debt.
In case all of these are confusing, you may want to call number #1 debt consolidation company, National Debt Relief. The company provides a free initial consultation with no obligations. You can call them up to get expert advice on your plans to consolidate your credit card debts.
When is it okay to use debt consolidation loan to solve credit card issues?
There are certain signs that using debt consolidation is the right option for you. Here are some of them.
When you have a good credit score. Obviously, the reason for this is that you can get the best terms on the consolidation loan. If you do not have a good credit score at the moment, you may want to pursue another debt relief program. Or you can postpone your plans to consolidate and work on your credit score first.
When you have a stable source of income. As mentioned, you need to prove to the lender that you can pay the loan back. The best way to do this is by showing them that you have a stable income. If not, your application might be denied.
When you can control your credit spending. Another sign that debt consolidation loan is the right option for you is when you know that you have the self-control to keep yourself from spending. Sometimes, borrowers start using their credit cards after it is paid off by the debt consolidation loan. This is usually a mistake because it will only increase your debt. Do not think your debt is paid off. It was just transferred to another lender but you still owe the same amount of money.
When you can commit to a repayment plan. The last sign is that it is okay to use a loan to consolidate credit card debt is when you know that you can commit to a repayment plan. Do not be tricked into feeling a sense of security that your debts are already paid off – just because you no longer have a balance on your cards. You simply transferred your debt. You still owe it. Paying it back will still take a long time so you have a job to do.
What are the debt consolidation loans you should never use to pay off credit cards?
Choosing the right debt consolidation loan for your credit card debt should be done carefully. If you choose the wrong loan, you might end up causing more problems in the long run. In fact, there are two different loans that you should try your best to avoid at all cost.
One is a family loan. This also includes any loan that you can borrow from relatives and friends. First of all, it is hard to find someone who will trust you enough with a loan – especially if they know that you will use it to pay off debt. Regardless of how you ended up with multiple credit card accounts, the debt still leaves an impression that someone is not good at managing their money. If the person is really close to you, chances are, they know that you are not the most trustworthy when it comes to using credit. But even if you find someone to help you, make sure you handle this carefully. It is not only the money that is on the line but also your relationship. The latter is actually more valuable than the money you are borrowing. So if you have any other choice, just stay away from borrowing money from family or friends.
The other loan that you should never use to consolidate credit card debt is the one that is funded by your retirement plan. This is what you had been saving for your future self. Why would you make your past self destroy it? You are already a couple of steps back because of your credit card debt struggles. You will be jumping way back and further from your financial goals if you touch your retirement fund. Unless there is nothing left, you should stay away from your retirement money.
Can you consolidate credit card debt without debt consolidation loan?
If you think that getting a loan is not really the best option after all, there are alternatives for you to consolidate your multiple credit card debts without borrowing money.
Balance transfer. The first option, might not be appealing to some people because it uses another credit card to consolidate. But before you judge it, there may be financial situations when this is the perfect solution to credit card debt. This option involves getting a new credit card that is offered with a zero interest rate. Some balance transfer cards are offered with a low-interest rate. You are encouraged to look for one that offers 0% interest. This is an introductory promo that will only last for a couple of months. The idea is to transfer all your high-interest credit card balances so you can aggressively pay it off in this new account without being charged with interest. Of course, you have to pay a balance transfer fee – 3% of the amount that you transferred. But after that, all payments will go to your principal balance.
Debt management. The other consolidation option that does not involve a loan is debt management. This will make you work with a debt professional. A credit counselor will help analyze your debt and financial situation so you can come up with a Debt Management Plan. This is a repayment plan that perfectly suits your finances. It is usually a plan with a lower monthly payment. This will be presented by the credit counselor to your different creditors. When they approve, you will send a single monthly payment to the credit counselor and they will take charge of disbursing that amount to your different creditors. You only have to pay a small service fee that is usually no more than $50 a month.
It might seem overwhelming to take in all these information but you need to be careful when making your choice. It is actually encouraged to look for researched debt consolidation reviews – specifically involving actual borrowers who have gone through credit card consolidation themselves. You might be able to relate to some of them. It could make your decision easier.