There are many ways to pay off credit card debt. However, you cannot just choose among them. You need to be able to identify the right program that will get you the best results based on what you want to happen after you get out of debt.
For instance, some people want to get out of debt fast because they cannot stand the stress anymore and they know that there is nothing else left to improve their financial situation. This is when bankruptcy becomes the best option. Some people want to get rid of the stress too but they have financial goals that requires them to maintain a good credit score (e.g. buying a home). This means they should consider a debt solution that will not tarnish their credit report. This is where debt consolidation becomes the perfect solution.
Benefits of using debt consolidation on credit card debt
The thing about credit card debt is it accumulates really fast because of the high interest. If you stick to paying only the minimum of your credit card balance, it will take you forever before you can hope to finish your payments. This is where debt consolidation can help out. It will provide you with the following benefits:
Lower monthly contribution
Lower interest rate
Single monthly payment
Longer payment period
Healthy credit score
The lower monthly contribution is caused by the longer payment period and the lower interest rate. There are a few instances wherein the low interest rate is not guaranteed but you have options to make sure that you will benefit from it.
The single payment scheme is also another benefit that you can enjoy through this debt relief program. The reason why this is perfect for credit card debt is because it keeps you from getting confused and thus late on your payments. When you are late on credit card payments, there are several things that happen. It starts with the late penalty charge that is an average of $35. That amount is added to your balance. Since the carry over balance plus charges is where your interest rate is computed, you can expect that your interest amount will increase too. That grows your debt amount. Not only that, the late payment will be reflected in your credit report and that lowers your credit score.
If you consolidate your multiple credit cards under one lender, you can keep this from happening because it is very easy to monitor one payment every month. You also get to concentrate more on growing your income so you can either increase your debt payments or grow your emergency fund.
Qualifications to prove you should consolidate credit card balance
If you want a foolproof way of consolidating your debts, you need to possess the right qualifications first.
You have a steady job
Debt consolidation takes quite a long time to finish – sometimes up to 5 years. If you used a secured loan to pay off your debts by combining your credit card debt and mortgage, it will take even longer. You need to have a stable and steady job in order to afford a lengthy payment scheme. You may think that the low monthly payment means there is a debt reduction. There is no such thing in debt consolidation – at least if we are talking about debt management, debt consolidation loan and balance transfer. You only get the low monthly contribution because of the long payment term. You need to have a plan to secure the payments that you will make in the next few years.
You have low interest rate qualifications
As mentioned, one of the benefits of this debt relief program is a low interest rate. However, you need to qualify for it. It actually depends on the specific debt consolidation method that you will use. In debt consolidation loan and balance transfer, a low interest rate is more possible as compared to debt management.
When you use balance transfer, you will get a zero interest rate but you need to be approved of the new account first. One of the qualifications for that is a good credit score. Although there are cards that would not really mind but you will get a faster approval if you do. Also, you need to remember that the zero interest is only for a short period – usually 6 to 18 months. After that, you will do back to the high interest that credit cards are known for.
In debt consolidation loan, you need either a good credit score or a collateral. The good credit score is for those who wishes to get an unsecured personal loan. The collateral is for those who combines their mortgage and credit card balances. Both qualifications will make you a low risk borrower and any of them will get you that low interest rate.
In case you do not have these qualifications, you can use debt management. All you can really do is to hope for the best in terms of the negotiating skills of the credit counselor who will be assigned to your account. In some cases, creditors agree to lower the interest rate as soon as you have made your payment current. In other cases, you just got lucky with a good credit counselor.
Just a bit of caution when you hire a debt management company to represent you. Make sure you are getting one that is accredited by the Better Business Bureau (BBB) and other reputable affiliations and organizations in the debt relief industry. You do not want to put your trust in the wrong company who could swindle you out of your hard earned money. You can also call the State Attorney General’s office in your area. Do a background check on the debt management company and make sure they do not have a pending case with the State Attorney General.