How to Consolidate Credit Card Debt
Angela Ruth is a social media and marketing manager. She works for Due.com, a company that helps with payment processing.
Ruth says she worked full-time throughout college and proudly graduated without student loan debt.
“But like most everyone else,” she says, “I have credit card debt.”
Ruth's statement reflects an unfortunate financial reality. Most people carry credit card debt at one or another. And sometimes, that debt can get out of control.
At that point, making your payments on time and full isn't easy.
Paying down your balance provides the easiest route to financial (and emotional) freedom. However managing multiple balances across several cards gets confusing and overwhelming.
What can you do to manage your credit card debt better - and pay it all off once and for all?
Consolidating Your Credit Card Debt
It is possible to get your debt under control. But you need the right strategy first. Debt consolidation can act as the catalyst to get you started.
Debt consolidation allows you to roll many debt balances into one.
How it works is you would take out a new loan or line of credit and use it to pay off your debts. Then, you can focus on managing and repaying just the new balance.
Consolidating your credit card debt can make the money you owe easier to manage. Instead of being scattered across several cards, you have one loan or line of credit to pay down.
And with the new loan, you can also get new terms that might be more favorable for you.
But the real benefit is the interest rate. Debt consolidation works best if you can roll your balances into a loan or line of credit with an interest rate lower than your current rates.
Doing so will save you money because you pay less in interest. You may also be able to change your monthly payment to make it more manageable or shorten the term to pay the debt off faster.
Does Debt Consolidation Always Make Sense?
Debt consolidation can sound great when you feel overwhelmed by your credit card balances. Before you jump in, understand that this isn’t a solution that works for everyone.
Consolidation is not a band-aid for debt. It works best as part of a long-term financial plan, and it requires more thought than simply taking out a new loan or line of credit.
When considering a debt consolidation loan, ask yourself:
- Are you committed to changing your behavior? This means spending less than you earn, halting all future charges to your credit card, and committing to a savings plan.
- Does your income allow you to pay off your debt (once consolidated) within five years?
- Is your credit card debt total less than half of your gross income?
If you answered “yes,” you can continue exploring consolidation to help you manage and repay credit card debt. If you’re not sure, consolidation may not make sense for you.
Consolidating credit card debt will be most effective when you stop the actions that led you to accumulate the deficit in the first place.
It would be best to make lifestyle changes that allow you to progress toward financial goals.
Otherwise, you may move the problem around instead of addressing the root cause.
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How to Get Started with Credit Card Debt Consolidation
Consolidating debt onto a credit card with a 0% introductory APR on balance transfers is one of the best ways to start the process. This allows you to pay down your balance with no interest.
Note that the 0% APR won’t last forever. It’s a promotional offer, so that a higher interest rate will kick in eventually.
That's why having a complete repayment plan is critical before doing a balance transfer.
That way, you can make the most of the no-interest period.
If you cannot do this, ensure you're ready to do another balance transfer right before the rate expires so you can have a few more months to pay the debt off at no interest.
Check out these two cards that offer balance transfers:
Chase Slate
This credit card is designed to help cardholders pay off debt through balance transfers.
There is no transfer fee if you move balances within 60 days of opening your account. (After 60 days, you pay a fee of 5% to transfer credits.)
With this card, you get a full 15 months with 0% APR on balance transfers and no annual fee.
Alliant Credit Union Visa Platinum and Platinum Rewards
Alliant Credit Union offers two credit cards: the Visa Platinum Rewards offers rewards, while the Visa Platinum does not.
More importantly, both cards offer an introductory 0% APR on balance transfers for 12 months with no annual fee.
All balance transfers are free unless expressly noted. There are no balance transfer fees with the intro 0% APR promotion.
The Importance of Your Credit Score in the Consolidation Process
Whether you apply for one of the above credit cards with a long no-interest rate period for balance transfers or want a credit card with a lower interest rate on your existing debt, you need an excellent credit score.
If your score needs help, do preemptive work before consolidating credit card debt. Here are some simple steps to take to give your credit score a boost:
- Make payments on time and in full.
- Do not open (or close) many new accounts at once.
- Limit the amount of hard inquiries hitting your credit report.
- Pull your credit report and check for errors.
Consolidating Credit Card Debt Through Loans
You might qualify for a debt consolidation loan if your credit is above average. This will come at a higher interest rate than most balance transfer credit cards, enabling you to pay your balance off on a fixed term.
This is a good option for anyone who wants to avoid another revolving line of credit - and for anyone who wants to have a guaranteed payoff date.
How it works is similar to a balance transfer credit card. You would apply for an installment loan (or a personal loan) for an amount high enough to cover your credit card debt.
If approved, the lender will buy that debt and place it on your loan at a (hopefully) much lower interest rate.
If this is an option you want to explore, start by looking at debt consolidation loans offered by credit unions.
Credit unions tend to be more flexible than traditional banks and work with a broader variety of people.
Peer-to-peer lending is another way to consolidate credit card debt. You might look into this if you struggle to qualify for a traditional loan through a bank.
Again, these loans usually have a lower interest rate than what you can get through a traditional lender. They may also offer more favorable terms for you.
How Debt Consolidation Can Impact Credit Scores
Five components go into creating your FICO score:
FICO Credit Score Factors and Their Percentages
| FICO credit score factors | Percentage weight on credit score: | What it means: |
|---|---|---|
| Payment history | 35% | Your track record when it comes to making (at least) the minimum payment by the due date. |
| Amounts owed | 30% | How much of your borrowing potential is actually being used. Determined by dividing total debt by total credit limits. |
| Length of credit history | 15% | The average age of your active credit lines. Longer histories tend to show responsibility with credit. |
| Credit mix | 10% | The different types of active credit lines that you handle (e.g., mortgage, credit cards, students loans, etc.) |
| New credit | 10% | The new lines of credit that you've requested. New credit applications tend to hurt you score temporarily. Learn more about FICO credit score |
Debt consolidation can impact your credit in different ways - bad and good.
If you apply for a credit card or a personal loan to consolidate your existing debt, you apply for a new line of credit.
That generates a hard inquiry on your credit report. Too many questions can damage your score. Even one inquiry tends to drop a score by about 5 points.
Another factor to consider is your credit utilization ratio. A large portion of your credit score depends on this, which is the relationship between the amount of credit you have available and the amount of credit you use.
Keeping your credit utilization ratio low (30% or below) is essential.
Therefore, opening a new loan or line of credit to pay off your credit card debt can help you lower your utilization ratio - so long as you don't close your credit card or cards.
What About Debt Relief Agencies?
If you can't be approved for a balance transfer credit card or loan, then it might be time to look at debt relief agencies or potentially even bankruptcy (the latter if you don't think you'll be able to pay your debt off as is within the next five years).
But neither of these situations should be viewed as a quick fix or entered into lightly.
Most debt relief agencies work on your behalf to negotiate with creditors. They aim to secure a lower interest rate on unsecured outstanding debt. They may even negotiate to lower your total balance.
However, debt relief agencies are an industry flooded with questionable tactics. It is possible to find a good one, but you may find many untrustworthy ones first.
Make sure you do a lot of homework before agreeing with one of these agencies. You should look for the costs, how they'll make payments on your debt, and the customer reviews.
If you see many people complaining about them on online reviews or complaints via the Better Business Bureau, do not work with them.
Know that most agencies require you to close any credit cards they help you to pay off. This can hurt your credit score in the short term.
You can rebuild that score over time, but there is an immediate impact. Agencies will also charge a fee based on a percentage of the debt you’re consolidating. It may be worth it if you need the help, but get the numbers up front.
Make sure you do not lose much money in the process - because that could be directed towards your debt payments if you decide to go it alone.
If you pursue bankruptcy as an option, you may have to pay legal fees, and your credit score will take a hit for the next several years.
If you're in way over your head, it could be that your credit score is the least of your worries.
If so, this may be a good option - be sure not to do it when you might also need to take out new credit, such as for a home or auto loan. It will take up to seven years to rebuild your credit after bankruptcy.
No Consolidation Option Will Work Unless You Have a Plan
No matter your path, it won't work out in the end unless you also create a plan. Write a new budget to understand your income and expenses and how they might need to change.
Review your spending to understand how the balances crept high enough not to be paid off every month.
Write down your goals for the future, so you have something more significant and satisfying to work towards as you pay off your debt.
The real key to success when you consolidate credit card debt is to identify a plan that works and then fully commit to it.
Finally, avoid taking on any new debt while you pay off your consolidated debt. Adding to the deficit while trying to pay it off will only slow you down.
