What is credit card consolidation?
Credit card consolidation refers to any solution that takes multiple credit calling card balances and combines them into a individual monthly payment. The independent goal is to reduce or eliminate the interest rate applied to the balance. This makes it faster and easier to pay off credit card debt. alternatively of wasting money on interest charges, you can focus your money on paying off principal—that ’ s the libra your actually owe. In many cases, you can get out of debt fast, even though you pay less each month. Credit card consolidation basically gives you a more efficient direction to eliminate debt .
Options for credit card consolidation
There is more than one means to consolidate credit card debt—in fact, there are three basic solutions. Two are do-it-yourself and involve taking out fresh finance to pay off your existing credit card balances. The second takes professional help. You set up a repayment design through a credit rede agency. But you still owe your original creditors .
- A credit card balance transfer consolidates credit card debt by moving your existing balances to a new balance transfer credit card. These cards offer 0% APR introductory rates on balance transfers, giving you a limited time to pay off debt interest-free.
- With a debt consolidation loan, you take out an unsecured personal loan at a low interest rate. You use the funds from the loan to pay off your credit card balances. This leaves only the low-interest loan to repay. There is also a secured version of this where homeowners borrow against their home equity, but that can be risky.
- A debt management program is basically a professionally-assisted debt consolidation program. You set up a repayment plan you can afford with the help of a certified credit counselor. Then they negotiate with your creditors to reduce or eliminate interest charges.
Identifying the best way to consolidate credit card debt out of these three options depends on your fiscal situation. That includes how a lot you owe, your recognition grudge, and how much money you have available for monthly payments .
Step-by-step instructions for credit card debt consolidation
now that you know what not to do and what you need to avoid when consolidating citation, you can start looking at how to consolidate credit tease debt using each method acting. This will help you decide on the best way to consolidate given your fiscal position.
Reading: Credit Card Consolidation
Assessing your financial situation
This mesa can help you understand how to choose the best consolidation options for your needs .
|Balance Transfer||Debt Consolidation Loan||Debt Management Program|
|Credit score needed||Very good-excellent (FICO 740 or higher)||Good-excellent (FICO 670 or higher)||Any score is eligible, including bad|
|Recommended debt range||Less than $5,000||Less than $25,000||$10,000 to $100,000+|
|Interest rate||0% APR introductory rate||Target less than 10% APR||Negotiated with each creditor; 0-10%, on average|
|Monthly payments||As high as possible to pay off balance quickly||Monthly payments may be lower than your total payment now||Total credit card payments reduced by up to 50%|
balance transfers are the best option for recognition consolidation when you have excellent credit and a limit sum of debt. Balance transfer cards offer 0 % APR for a specify time after you open the report. The higher your score, the longer the 0 % APR menstruation .
The goal is to pay off your libra before the 0 % APR period ends. Once it does, the regular APR for remainder transfers will apply, so your rate will basically be correct spinal column up where you started .
- Shop for a balance transfer card that offers low fees and the longest 0% APR teaser rate; teaser rates usually apply for 6-18 months, depending on your credit score.
- Apply for the best card that you find. Only apply for one card, because filing multiple applications can decrease your credit score.
- Once you open the account, begin transferring your balances. You can call customer service or set them up online. You’ll need the account numbers for all balances you wish to transfer.
- Be aware that there will be a fee applied for each balance transferred. Fees range from $3 per transfer to 3% of the balance transferred.
- With your balances consolidated, quickly pay down your debt. Ideally, you want to pay off the full balance before the teaser rate expires. So, divide your total balance by the number of months you have the teaser rate.
For case, let ’ s say you owe $ 3,000 on three accounts. You open a libra transportation wag that offers 0 % APR for 12 months with a fee of $ 3 per transfer. You ’ vitamin d pay $ 9 to transfer the three balances, giving you a full counterweight of $ 3,009. To pay that libra off during the introductory period, you ’ d need to make payments of at least $ 250.75 per month .
How to consolidate credit card debt with a personal loan
Using a loanword to consolidate citation batting order balances is another DIY option you can use if you have beneficial credit. You take out a loanword the lowest pastime rate possible and use the funds you receive to pay off your credit cards. This leaves alone the loan to repay .
This is frequently the best manner to consolidate credit card debt if you want lower monthly payments. Depending on the condition you choose, you can significantly reduce how a lot you pay each calendar month. But you placid get out of debt faster than you would with traditional payments thanks to the moo APR .
- Shop around for the right debt consolidation loan. You want to aim for low APR, low fees and a term that will give you monthly payments you can afford.
- When you find the best loan for your needs, you apply. Only apply for one loan, because applying for multiple loans at once will hurt your credit score.
- Choose a term that offers monthly payments you can afford. A longer term means lower monthly payments, but higher total costs. A shorter term will reduce total costs, but it means higher monthly payments.
- Once approved, the funds are disbursed to pay off your credit card balances. In some cases, the lender will give you the money to disburse. In others, they’ll pay your creditors directly.
- Pay off the loan with fixed payments. If the loan doesn’t have any early repayment penalties, you can also make extra payments. For instance, pay off a big chunk of the debt with your next tax return.
Consolidating credit card debt through a debt management program
If you can ’ triiodothyronine consolidate credit wag debt on your own—either because you have a gloomy credit rating score or excessively much debt for a DIY solution—then you need to call in professionals .
- Contact a nonprofit consumer credit counseling for a free debt evaluation. The credit counselor will review your debts, credit, and budget to see if you can use do-it-yourself solutions. If not, as long as you have the ability to make monthly payments, you can usually qualify for a DMP.
- Your credit counselor will help you find a payment that works for your budget. Set up and monthly administration fees will be rolled into this payment. Fees are capped at $79 nationwide and set based on state regulations where you live.
- Then the credit counseling team calls your creditors to negotiate. They negotiate to reduce or eliminate interest charges and stop penalties that may be getting applied to your debt.
- Once all your creditors agree to accept payments through the DMP, your plan starts. You make one payment to the credit counseling agency each month. They distribute the money to your creditors as agreed.
- You still owe your original creditors. The credit counseling agency is basically there to be your advocate and help ensure you can stick with the program.
During a debt management program, all credit poster accounts you include will be flash-frozen when you enroll. You won ’ deoxythymidine monophosphate be able to apply for new accounts during the broadcast. But this can be beneficial because it helps you break any credit addiction that you ’ ve developed. The credit rede team besides helps you set a budget, so it ’ randomness easier to live credit-free .
not certain which consolidation choice is correct for you ? Talk to a certified credit rating counselor for a dislodge, no-obligation debt evaluation .
A real example of credit consolidation
credit cards have relatively high concern rates compared to early types of debt. Credit consolidation solutions allow you to lower the pastime rate applied to the balance. As a leave, more of each monthly payment gets applied to the star balance. This allows you to get out of debt flying, save money on interest charges, and—in many cases—lower the monthly payment .
here ’ s an example of how it works when you use a debt management program to consolidate. Let ’ s say you have four citation cards .
|Current Balance||Interest Rate (APR)||Monthly Payment|
|Credit card 1||$4,002||20%||$160.08|
|Credit card 2||$3,375||17%||$135.00|
|Credit card 3||$4,846||21%||$193.84|
|Credit card 4||$3,475||14%||$139|
Total current balance: $ 15,698
Average interest rate (APR): 18 %
Total monthly payment: $ 627.92
Estimated time to pay off total balance: 11 years, 1 calendar month
Total estimated interest charges: $ 8,912.98
then you consolidate the debt with a debt management plan. The citation counseling team works with your creditors, who agree to reduce the matter to rates applied to your balances. They besides agree to accept reduced monthly payments .
|Current Balance||New Interest Rate (APR)||New Monthly Payment|
|Credit card 1||$4,002||8%||$81|
|Credit card 2||$3,375||7%||$75|
|Credit card 3||$4,846||6%||$85|
|Credit card 4||$3,475||1.9%||$62|
Total current balance: $ 15,698
New average interest rate (APR): 5.73 %
New monthly payment: $ 303
Time to pay off total balance: 4 years, 10 months
Total estimated interest charges: $ 2,459.65
In this exemplar, consolidation would :
- Lower your monthly payments by $324.92
- Allow you to get out of debt six years and three months sooner
- Save you $6,453.33 in interest charges
You hush pay back the fully balance owed, but you do it in a more effective way by minimizing interest ( APR ). consolidation lowers your monthly payments, the number of payments you need to make to become debt-free, and the sum pastime charges .
While balance transfers and debt consolidation function differently, the consequence is the lapp. You calm minimize interest, combine your debts into one monthly requital, and enjoy the lapp benefits that you see in the model above .
If you have questions about debt consolidation or need help finding the best means to consolidate, lecture to a certified credit advocate for dislodge .
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10 things to watch out for when you consolidate
Using credit batting order consolidation to become debt-free takes the right scheme and discipline. You need to make sure that it ’ s the correct fit for your position and then follow through. Heeding these warnings can help you make sure that credit consolidation will be a successful solution for you. Always consider your fiscal situation cautiously before you consolidate. If you ’ re not sure if consolidation is right for you, call (844) 276-1544 to receive a free evaluation from a certified credit counselor .
10 Warnings to Heed When You Consolidate Credit Card Debt
These are the biggest pitfalls that consumers run into when they consolidate recognition card debt .
The biggest err people make after consolidating credit card debt is that they don ’ deoxythymidine monophosphate stop making new credit tease charges. If you ’ re trying to pay off debt, you need to focus on elimination. New charges just set you farther back from your goal—it ’ s like two steps forth, one gradation back .
A Consolidated Credit client named Carol ran into this problem when she consolidated on her own using a balance transplant credit rating card. She used the menu to consolidate her debt, but she hadn ’ deoxythymidine monophosphate balanced her budget. As a solution, she ran up fresh balances quickly .
[ bctt tweet= ” “ I should have left the other credit cards entirely once I transferred my balances, but I still needed them to cover basic necessities. ” – Consolidated Credit Client Carol # debtconsolidation ” username= ” consolidatedus ” ]
The right way: Before you consolidate, you need to set up a household budget. The goal is to cover all your bills and necessary expenses with income. This helps you avoid relying on your credit cards to cover everyday needs. If you can ’ t cover all your daily expenses without credit, then consolidating your debt has a higher chance of failure .
For consolidation to be effective, you need to reduce or eliminate matter to charges applied to your debt. Otherwise, you don ’ t generate the cost savings you need for this to be an effective way to eliminate your balances. This means you need at least a beneficial or excellent credit score to qualify for do-it-yourself debt consolidation at a good, low-interest rate .
If you don ’ t have estimable credit and you try to do-it-yourself, the rate you will qualify for may be excessively high to provide the profit you need. Interest charges will eat up every payment you make, making it impossible to eliminate debt cursorily or effectively .
The right way: Your finish when consolidating should always be to get the interest rate ampere close as possible to zero. At most, the rate should be less than 10 % to make consolidation an effective solution for you .
Most credit cards are unsecured debt. That means that there ’ s no collateral in place to protect the creditor in case you default. That ’ south unlike from plug debt, like a mortgage which uses your home as collateral. In this character, if you default on your mortgage, the lender will take your base and sell it to recoup their losses .
Some people think dwelling equity loans are a well way to consolidate credit rating card debt. however, this effectively converts unguaranteed debt into secured. now, if you fall behind, you can be at risk of foreclosure .
That ’ s what happened to Carol after her balance transfer solution didn ’ deoxythymidine monophosphate employment. A creditor advised that she could take out a second gear mortgage to pay off her recognition cards. unfortunately, that just made her fiscal situation worse .
“ My mortgage payments went up to $ 2,000, ” Carol explains. “ I could scantily make the payments, but entirely if I started charging my daily needs on credit cards again. And out of that $ 2,000, I was paying over $ 1,000 a month in interest on the mortgage. ”
The right way: Keep unbarred debt unguaranteed. Borrowing against your home fairness increases your risk of foreclosure. If you can ’ t make the payments on a credit tease, it can lead to collections. But if you can ’ t make the payments on a home equity loanword or HELOC, you risk losing your home !
In most cases, you should expect some kind of cost associated with consolidating your debt. Some fees are normal. however, excessive costs mean you have more to pay off. thus, while you should expect some total costs, avoid high fees when possible .
For case, let ’ s say you want to use a credit calling card balance transfer to consolidate. Almost any balance transfer credit card you choose will have a fee that ’ s applied for each libra transferred. Some have a $ 3 tip per transfer, while others are 3 % of the balance you move. That ’ s a big remainder. If you transfer $ 25,000, then the 3 % card will increase the cost of debt elimination by $ 750 .
It ’ second significant to note that fees for debt management programs are set based on your budget and rolled into the payments for the program. These fees are regulated by states and capped at $ 79 nationally. The average node pays around $ 49 .
The right way: Make certain you understand costs and fees before you consolidate. Compare options to find the lowest fees potential with the solution you want to use. For exemplar, compare balance transplant fees on different cards before you apply .
Let ’ s be honest, most people would prefer to solve their own debt problems on their own. It ’ s not easy to let person into your fiscal populace, specially if things aren ’ t precisely going well. But using a do-it-yourself solution from a fallible fiscal position is a recipe for calamity .
The right way: If you owe more than $ 30,000 or have a bad credit score, consolidating on your own can be rugged. You may be better off asking for serve .
When people beginning consolidate, they ’ ra excited that they last have a solution to pay off their debt. so, they ’ rhenium bequeath to do whatever it takes to reach zero. however, as time passes, it ’ s comfortable to get tired of sticking to a budget and cutting back. As clock time passes, you slip back into bad spend habits and may start making new charges again .
With debt management course of study clients, we normally see this slump around the six-month mark. Keep in mind that registration in a debt management program is wholly voluntary. however, if you drop out your creditors are probable to restore your original interest rates and can even reapply penalties .
The right way: First, choose a solution that gets you out of debt adenine cursorily as possible. Anything longer than 60 payments ( 5 years ) is generally excessively farseeing to keep up with effectively. And always remember, while debt elimination can be long-winded, it ’ south worth it in the end !
Don ’ thymine confuse commercials that offer to “ settle your debt for pennies on the dollar ” with credit batting order consolidation. Consolidating credit cards—even with a debt management program—is not the lapp thing as a debt settlement program .
Debt consolidation constantly pays back everything you borrowed, to help minimize credit damage. By contrast, each debt you settle creates a negative comment on your credit that remains for seven years after discharge .
The right way: entirely consider settlement once you ’ ve exhausted all other options. It should only be used for debts that are already in collections. And if you ’ re worry about damaging your credit rating, fair don ’ t do it !
If you consolidate on your own, then you can seek any type of new finance that you need. If you consolidate through a debt management program, you can qualify for loans like a mortgage or car lend ; however, you can ’ metric ton apply for modern credit cards .
In any case, be very careful with any newly finance you take out while you repay consolidated credit card debt. Consolidation often makes it easier to qualify, because it fixes your recognition use ratio and helps build a positive citation history. Those are the two biggest factors used to calculate your credit score .
The right way: evening though you can qualify for a loan, it doesn ’ thyroxine entail that you should apply. Always consider your debt-to-income ratio cautiously. If you ’ re close to your borrowing specify, a new lend could make it tough to keep up with your bills. ideally, you want your debt-to-income proportion to be 36 % or less to make it easy to maintain stability .
once you complete a plan to repay your debt, you should besides complete a thorough review of your recognition report. Creditor should automatically inform the credit chest of drawers that your account is paid or stream. however, mistakes and errors happen frequently, particularly following a period of fiscal hardship. That means it ’ s up to you to make sure your credit rating report is up to go steady and that old errors aren ’ thyroxine hanging around .
The right way: Go to annualcreditreport.com to download your credit reports from each credit chest of drawers for barren. then check them for the pursuit errors :
- Make sure account information has been updated to reflect your zero balances.
- If you go through a debt management program, make sure the credit history on each account shows that you made your payments on time.
- Any paid collections accounts should show up as closed; if you negotiated with the collection agency to remove the account in return for payment, make sure it’s gone.
- All your account statuses should be current.
If you find any mistakes, take steps to dispute them .
The last thing you want after all this work is to end up properly back in the lapp situation. so, figure out how you ended up with sol much debt, and then take steps to adjust your fiscal habits. That room, once you get out of debt, you can stay that way .
The right way:
- Set up your budget
- Establish an emergency savings fund to cover unexpected expenses
- Never spend more than 10% of your income on credit card debt payments.
Of course, evening the best-laid plans can get derail, particularly after a few years. The well news is that if you end up in the same site, you can consolidate again .
Consolidating credit card debt in 2021
“ The current fiscal crisis has created a singular site for people considering credit consolidation, ” Consolidated Credit President Gary Herman explains. “ The Federal Reserve has dropped interest rates angstrom low as possible to encourage borrowing in a toss off economy. That ’ south bang-up for people thinking of getting loans to consolidate credit card debt .
“ On the early hand, lenders have tightened lend standards, with tougher credit grudge and debt-to-income ratio requirements. That makes it harder for people to qualify to take advantage of those abject rates. ”
Low rates are favorable for consolidation
During an economic downturn like the one we ’ ra feel now, the Federal Reserve will lower the Federal Funds Rate, which is the concern rate that fiscal institutions use to set their interest rates. The federal Funds Rate is presently near zero—it ranges from 0.00 to 0.25 .
That ’ randomness full for consumers who want to borrow. Interest rates on diverse types of loans are much lower than they were before the downturn started. That means if you can qualify for a debt consolidation loan, you can enjoy a low rate. It ’ s the reservation separate that can be challenging .
Approvals are harder to come by
While the Federal Reserve wants to encourage borrowing in a down economy, lenders want to limit their risk. This means that they only want to extend loans to people that are likely to pay them back. They ’ re intelligibly worried about defaults if people can ’ deoxythymidine monophosphate pay .
As a resultant role, they “ tighten ” lend standards. This means you need a higher credit score and a lower debt-to-income proportion to qualify for new credit. This means that it ’ mho presently tougher to qualify for debt consolidation loans and balance transfer credit cards .
Limited terms on new credit
Another way that lenders and creditors protect against hazard is to limit the terms they offer to new customers .
For lenders, this means that they may cap personal lend limits. rather of allowing you to borrow up to $ 50,000, the lender may merely offer $ 20,000 or lower, depending on your credit. If you are considering a credit consolidation loanword, you need to make certain you can qualify for a lend sum large enough to pay off all your credit card balances .
For credit batting order companies, there are two ways that they limit terms during an economic downturn. One is to offer a lower credit limit on the card. The other is to reduce the 0 % APR period you enjoy when you first open the history .
“ Two years ago, credit batting order companies would offer 0 % APR for up to 24 months on balance transfers, ” Herman explains. “ These days, most creditors limit that introductory period to 12 to 18 months. ”
This is crucial for people considering getting a balance transfer card to consolidate. Let ’ s say you want to consolidate $ 12,000 in credit poster debt. With a 24-month 0 % APR period, you could pay off the entire balance during the interest-free period with $ 500 payments. however, if the basic period is entirely twelve months, you would need to pay $ 1,000 per calendar month .
Does the downturn affect consolidation with a debt management plan?
“ The good newsworthiness is that the limitations that you see with do-it-yourself debt consolidation don ’ t affect people who want to consolidate with a debt management design, ” Herman says. “ There are never any credit score or debt-to-income ratio requirements you must meet to enroll in a debt management program. You can use the program careless of how low your credit score is or how a lot debt you need to consolidate. ”
This means that people who want to consolidate still have a room to do therefore flush if they can ’ thyroxine stipulate for the do-it-yourself options .
“ Credit card companies want to work with people, ” Herman encourages. “ Working with a recognition counseling administration like Consolidated Credit shows them that you ’ re serious about pay back everything you charged on your accredit cards. so, we can work with them to reduce or eliminate the pastime charges applied to your balance and find a monthly payment that you can afford. It ’ s a great room to consolidate for those who can ’ t successfully consolidate on their own. ”
Consolidated Credit offers proven results in credit consolidation
In closely 30 years, Consolidated Credit has helped consumers consolidate over $ 9.75 billion in credit wag debt. In 2020 alone, we helped over 17,000 Americans consolidate over $ 232 million in credit poster debt .
This map shows the average proportion that consumers had in each submit when they consolidated. You can besides hover over each state to see how much debt we consolidated for clients in each department of state in 2020 .
Keep in mind that we understand that credit consolidation is not the right solution for everyone. As we said in the presentation, this is not a fiscal eloquent bullet train that will work in every situation .
As a nonprofit organization credit counseling constitution, our certified credit counselors will alone recommend a debt management program if it is the best debt solution to use in your situation. then, while we provided release credit rating rede to over 628,000 people stopping point year, only roughly 17,000 went on to consolidate with us .
For others, some received recommendations to apply for credit consolidation loans or balance transmit cards. If a counselor sees that you should be able to consolidate successfully on your own, they can confirm that for you.
In other cases, the people who received credit rede were simply not a good fit for consolidation in their current situation. many were lining unemployment and lose income. While credit consolidation may lower person ’ s monthly payments, those payments need to be made .
If you don ’ t have the income to consolidate, then you may need to wait for your situation to improve or consider other debt stand-in options, such as bankruptcy .
spill the beans to a certified credit counselor to find the best credit consolidation option for your needs .