Do you feel as if you’re being strangled because of your credit card debts? Are you letting your statements pile up on the desk or counter because you just can’t face them? While this might not make you feel any better, you’re not alone. According to one study American households are now carrying an average of $15,675 just in credit card debt, which is why so many people have turned to credit card debt consolidation.
If you’d like to get your credit card debts under control and ultimately paid off, then consolidating them might be your best option. The way it works is that the first thing you will need to decide is if you should get a new loan, go to a credit counseling agency for a debt management plan or open a new credit card. Whichever of these you pick you will use the money to pay off the balances on your multiple credit cards. One of the biggest benefits to this is that you would then have just one payment to make each month on the debt management plan, the new balance transfer card or the loan. In addition, one of these options could also save you money.
Which would be best for you?
Which of the three options described above would be the best way for you to consolidate your credit card debts – or whether debt consolidation would even work for you – will depend on your financial situation. This means you might want to talk with a credit counselor to determine your best alternative. Beyond this, here are five tips that could help you choose the credit card debt consolidation strategy that would be best for you.
Tip 1: Check your credit reports
A critical first step is to check your credit reports to make sure they are accurate. An error on any of your three reports (from TransUnion, Equifax and Experian) could stop you from getting the debt consolidation help you need. If you do find an error, you must dispute it. While the three credit bureaus include forms on their websites for disputing errors most experts feel it’s much better to write a letter to the appropriate bureau with whatever documentation you have to prove your case. Plus, your credit reports will provide almost all the information you need to decide which strategy for credit card debt consolidation would work best for you.
Tip 2: Learn your options
We’ve mentioned the three options available for credit card debt consolidation and you’ll need to investigate them carefully before choosing one. This is because your credit history could limit your debt consolidation choices.
A consolidation credit card
If your credit card debts have high interest rates – at 17% or higher – then one option would be to transfer their balances to a new credit card that has a lower interest rate. This would save you money on your finance charges and you’d have a lower monthly payment, which should make it easier for you to cover it. If you have good credit, you might be able to get a 0% balance transfer card where you might have as many as 18 months to pay off its balance.
A debt consolidation loan
A second option would be to get a personal debt consolidation loan. This type of loan charges simple interest as compared with credit cards where their interest rates can be variable. They usually have terms of 3 to 5 years so that you would know exactly when you’ll be debt free. Banks and credit unions both offer debt consolidation loans but whichever you choose you will need to learn the lender’s credit requirements as you will need very good credit in order to get the lowest interest rate on your loan. You should also check out online lenders as they often offer lower interest rates than the conventional lending sources.
A debt management plan
If you have a really serious problem with debt you should consider going to a good, non-profit consumer credit counseling agency for a debt management plan. If you choose this option, you will also have only one payment to make a month as the credit counseling agency will take responsibility for paying your lenders. These plans typically take 3 to 5 years to complete.
It’s important to do the math before choosing one of these three options. This is because credit card debt consolidation isn’t always free. For example, if you choose to do a balance transfer there will likely be a fee that could be as high as $300. And, of course, the same thing is true of a debt consolidation loan. It may have a loan origination fee and it’s important to make sure you will be able to afford the monthly payment. The net/net here is that you need to ask about any fees you may be charged regardless of which credit card debt consolidation option you’re considering. Then factor those numbers into your decision.
Tip 4: Consider what will happen to your credit score
There are many ways that your credit score can be affected by credit card debt consolidation. This, too, will depend on which option you select. For example, if you decide to consolidate multiple credit card balances on to one card, you’ll need to avoid maxing out its limit as this would damage your credit utilization ratio, which makes up 30% of your credit score.
A debt management plan might also have a bad impact on your credit. This is because your lenders will suspend or close your accounts while you’re in the debt management program and this, too, can have an effect on your credit utilization ratio. Finally, if you apply for a new line of credit this will result in what’s called a hard inquiry on your credit report and it may also lower your credit history’s average age.
Would you like to know more about how your FICO score is determined and why credit card debt consolidation could effect it? Here’s a video from the Federal Bank of St. Louis that explains it.
Tip 5: Commit to your credit card debt consolidation plan
Whether you decide to transfer your credit card balances to a new card, pay off your debt with a debt consolidation loan or go to a consumer credit counseling agency for help this is only the start. If you truly want to become debt free you must commit to the plan and stick to it. You should also review your credit reports periodically to keep track of how your credit is being affected by your credit card debt consolidation plan. You can get your three reports free by contacting the credit bureaus or on the site www.annualcreditreport.com.