Is Credit Card Debt Consolidation Right For Me?
Consolidating credit card debt is not a recent phenomenon. From time to time, people have been learning & adapting to this task to better their financial lives. Without it, more opportunities in finance, and thus greater mobility, better financial health or peace of mind is almost impossible to achieve, especially for those with poor credit score and large amount of debt. In other words, it is simply not affordable for them to live without understanding this subject and how it works.
And so with the knowledge of debt consolidation comes the higher possibility of paying off high interest loans and other debt. The conventional definition of debt consolidation is combining two or more debt into one single manageable one. Not only that, it is also about learning various financial resources and wealth of other things in terms of interest rates, lenders and their services. It is a process with which the world works for many debt holders and make their lives easier.
About Debt Consolidation
Debt consolidation involves rolling multiple debts into a single payment that is affordable for the borrower. Such debt include, but not limited to, credit card debt, utility bills, mortgage loans, student loans, business loans and personal loans. With this mode, borrowers can not only reduce their monthly payment but the entire loan amount as well. This is an opportunity for them to reorganize their financial record so that the debt gets paid faster. With reorganizing comes the advantages of paying low interest rate, change of due dates, bill payments on time and much else. It is therefore in the interest of the borrower that debt consolidation work, most of the time.
How to Consolidate Credit Card Debt
In order to combine or consolidate credit card debt into a single manageable loan, you need to pay attention to what you owe, your monthly bills, earnings, expense and affordability. Another important area to consider is your credit score. A good credit number will let you earn a low interest rate, whereas low score means you are considered as a risky borrower.
There are mainly two ways to consolidate credit card debt:
Get a zero interest balance transfer credit card
With zero interest credit card, you can transfer all your loans onto the card for zero fee. Most credit card lenders offer a promotional period for consolidating debt. They also offer credit card debt consolidate guidelines to help borrowers pay off their debt faster. Fixed rate loan, on the other hand, lets you pay off the high interest loans with easy one time payment. You can then set up a payment plan to pay off the consolidated loan.
Other way is taking out a 401K or home equity loan
These loans pose risk to your home or retirement money. Either way, even if you opt for this type of loan, your interest rate will depend on your credit score and debt-to-income ratio.
Is credit card debt consolidation right for you?
In many cases, debt consolidation can be a smart move for your financial needs. However, the total success depends on a number of criteria. For instance, if your debt (excluding mortgage) exceeds 40 percent of your gross income, debt consolidation may not help much.
Again, if you have a low credit score, you may not be eligible to obtain zero or low-interest credit card to payoff your higher interest debt. Additionally, your cash flow needs to be sufficient enough to cover some part of the payments toward your debt. Running up debt in the future will also hurt your chances of success with debt consolidation plan.
The below is an example of how debt consolidation will help your financial situation. Suppose you carry three credit card debts with rates ranging from 20% – 25% that you want to pay off as early as possible. If your credit score is good due to past payments, you may quality for a unsecured loan of 7% or less. This interest rate can save you a lot of money in interest and significantly lower your debt.
Conversely, making a minimum payment on your debt consolidation loan after paying off other higher interest debt can hurt your bottom line. If you entered into a five year term agreement with a lender, paying the bare minimum every month will accrue more principal and interest, and your credit score will take a beating making you ineligible for future loans.
Some Frequently Asked Questions
When is credit card consolidation a good idea?
Debt consolidation is a smart move when you are offered a better loan term and when you can make payment on time. Consolidating all your credit card debt should be a long term plan to reach your financial goals. For some reason, if you are unable to make the monthly payment on time, consolidating debt can only worsen your situation.
Who lends money during a debt consolidation?
It is your responsibility as a borrower to settle credit card debt with the new loan. You either pay it directly to your creditor or let the lender send the money to the credit.
Is credit card debt consolidation right for me, and will it hurt my credit?
The answer to the question “is credit card debt consolidation right for me?” is, it depends. If you are able to make monthly payment on time for your new loan, over the course of years, your credit score will increase. On the flip side, if you run up credit card balances, miss payments or close other cards, your credit score will be affected.
When is consolidation a bad move?
Debt consolidation sometimes doesn’t cure the core issue. It may not address the borrower’s compulsive spending habits, carelessness with money or failure to pay the minimum balance in the first place. It is also not a solution for those who accumulate debt on a regular basis and the reduced payment is not enough to cover all of the debts. On the other hand, if your debt is not overwhelming except for the interest rate, you are able to pay off within the agreed terms at a convenient pace, debt consolidation can be a silver lining in an other negative circumstance.