Credit card consolidation – Consolidate all cards into one

When you’re feeling weighed down by high-interest rates on your cards, credit card consolidation could give you some relief from your financial woes. It helps to cut costs, lower interest rates, and simplify monthly payments.

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What is credit card consolidation?

Credit card debt consolidation is the process wherein you can get rid of making multiple payments every month while saving money on the interest. This credit card debt relief program gives you a single payment plan at a low-interest rate. So you’d pay less in interest while paying back your creditors.

When should I consolidate my credit cards?

  • > Your overall credit card debt is 50% more than your income
  • > You don’t want to increase your outstanding balance
  • > Your credit score is good enough to qualify for a 0% interest balance transfer card
  • > The maximum portion of your income goes towards monthly payments

In a nutshell

Credit card consolidation works only when it helps you to save $$$ and manage debts easily. But how can you consolidate credit card bills? Which method is right for you? Let’s find out.

How to consolidate credit cards

No matter what option you choose, each has risks and trade-offs, – Todd Huettner (personal finance expert)

Enroll in credit card consolidation programs
This involves making a single monthly payment to the credit card consolidation company, which in turn distributes the amount amongst your creditors. The company negotiates with your creditors to slash interest rates on your credit cards.
Pros: You pay a low-interest rate on your cards.
The credit card consolidation company handles your debt collection calls.
Cons: You have to pay a small fee. You can’t use your credit cards to avoid incurring more debts.

Opt for cash-out refinancing
You can borrow money against your home by using a HELOC or cash-out refinance to clear your outstanding balance.
Pros: The interest rate on a home loan is around 5.73% now. It is much less than the credit cards.
Cons: You’re converting the unsecured loan into a secured loan. You can lose your home in the future.
You need to build equity in your home.
You have to pay an application fee, origination fee, and processing fee.

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Borrow from your friends or 401(k) account
Have you been putting money in a retirement savings account? If so, then you can use that fund to pay back your creditors.
Pros: There is no credit check. You can get money fast.
Cons: Your retirement savings are exhausted.
You may have to pay income tax.
You can borrow up to 50% of your savings and pay off the loan within 5 years.
You may have to pay an early withdrawal penalty.

Use a balance transfer card
You can transfer the entire balance into a 0% interest card and make a single monthly payment to clear your dues.
Pros: You can save the entire interest if you pay the full amount within the promotional period.
Cons: You have to pay a balance transfer fee on the transferred amount.
You should also have a good credit score.
You have to pay the total transferred amount within 12 months to 15 months.

Take out a loan from your friend
You can use your personal relation to combine credit card debt into one payment. There is no credit check, and you can obtain a loan at a 0% interest rate.
Pros: You can qualify for a loan with a bad credit score.
Cons: Your personal relationship may get ruined. It can create a lot of tension as there is no proper paperwork. Unless your friend is a rich guy, you can get only a limited amount from your friend. He has to take care of his expenses as well.

Take out a personal loan
You can borrow a personal loan from a bank or a credit union or online lenders to consolidate credit cards into one payment.
Pros: The interest rate is lower than the credit cards.
Payments are fixed. So you know how much you have to save every month.
Cons: You may not qualify for a personal loan with a poor credit score.
You have to pay an origination fee.
It may take several years to repay this loan.

The best way to consolidate credit cards is to choose an option that has maximum pros and minimum cons. Ideally, you should try to take advantage of all the benefits and eliminate your debts as soon as possible.

Credit card consolidation – Pros and cons

Pros –

  • > It helps you to simplify the payment process
  • > You make only one payment every month
  • > You have to meet only one deadline every month
  • > You save money due to low-interest rate
  • > You are not required to pay fines and late fees
  • > You can reduce your credit-utilization ratio

Cons –

  • > The debt is not forgiven
  • > You have to save money every month
  • > You have to cut down your unnecessary expenses
  • > It will take 2-5 years to pay off credit cards
  • > You can’t miss out a single payment

What are the other ways to reduce credit card debts?

Credit card debt settlement

The credit card settlement process is different from the credit card consolidation. Here you don’t pay the full amount to your creditors and settle your debt in one lump sum payment.

Credit card debt management

This option is also different from credit consolidation program because here you get a budget plan and an affordable payment plan to pay off your plastic cards.
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Use this option for paying off credit cards when you either have non-exempt assets of a certain value or have the capability to follow a court-monitored repayment plan for 3-5 years.

Credit card debt consolidation – Facts to know before you seek credit card help

Credit card debt consolidation helps you repay separate high-interest bills with a single and affordable payment plan. It helps to reduce your financial burden and consolidate credit card bills fast. But there are a few facts you should be aware of before getting credit card help and these are:

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Not all programs are good

Credit card debt consolidation programs vary between different companies. Beware of the companies who make lucrative sales pitch but have too many negative client testimonials. You should do extensive research when you decide to seek credit card debt relief.

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You have to pay a fee

Credit card debt consolidation programs include fees for consolidating your bills. Some programs may include an upfront fee. You should try to avoid those programs. Keep in mind that you have to pay a fee for settling credit card debt also. Credit card debt settlement companies charge a fee for credit card lump sum settlement after completing a successful negotiation process. Stay away from companies that have a high fee structure.

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You can’t spend a lot

Be it a credit card consolidation program or a loan, you have to make a fixed payment every month. You can’t miss out a single payment without informing the credit card debt consolidation company or your lender. You can’t spend like a billionaire simply because you aren’t one. You have to save money every month in order to make payments every month.

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You could end up paying more

Although credit card consolidation programs help to reduce interest rates and monthly payments, you could end up paying a significant amount in the long run if the tenure is too long. Calculate how much you have to pay in total when you’re enrolled in the program. Thereafter, calculate how much you have to pay without enrolling in the program. Find out how much you’re saving in total.

How does credit card consolidation affect credit score?

Credit card debt consolidation can help to increase your credit score depending on the strategy you choose. For instance, if you’re transferring balances onto one credit card, then make sure you don’t max out the credit card’s limit. It will increase your credit utilization ratio.

If you’re taking out a credit consolidation loan, make sure you pay it off as soon as possible. When you replace multiple bills with a single loan, you’re actually bringing your credit utilization ratio to 0%. This gives a big boost to your credit score. However, you’re forgetting one significant point. You’re are now left with a new loan. If you have no other loans or debts, then your total utilization ratio is 100%, which is again bad for your score. So you have to take steps to repay this new loan as early as possible.

Don’t close your credit cards after completing the credit card consolidation program because that will drop your credit score. When you keep your old credit cards open, you get dual benefits. First, the long credit history makes a positive impact on your credit score. Secondly, you won’t increase your credit utilization ratio. Ideally, you should maintain a 30% credit utilization ratio for having a good credit score.

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