Credit card debt is a sneaky beast. Whether it comes on in a flash of lightening or creeps up like a long winter snowstorm, the havoc it wreaks can feel like a tornado has ripped through your life.
What’s worse, it’s painfully easy to feel as though you’re stuck. That you have absolutely zero options. That you may pay forever and never see real results – or stop paying and live a life of bad credit and calls from collections agencies.
I know this feeling all too well. I’ve been there and luckily now I’ve made it to the other side – but not without a good deal of anxiety along the way. And now I’m going to tell you what I wish I had understood better then:
You have options. You have a choice in how to handle your credit card debt. Credit card debt does not have to be a financial death sentence.
“What options,” you might be thinking. There are many! But the one I want to focus on here is one that can help you lower your interest rates and shorten your repayment period: debt consolidation.
Done well, debt consolidation can be the key to taking control of your credit card debt. Done without a plan, debt consolidation can unfortunately lead to more debt. That’s why it’s important to choose your options carefully and firmly follow a plan as you go. Here’s how you can.
How to Consolidate Credit Card Debt
The idea behind credit card debt consolidation is simple. You basically obtain a new loan or line of credit to pay off one or more of your credit cards. That gives you the chance to make only one monthly payment instead of multiple and ideally it will also lower your interest rate.
In other words, you can simplify your life and boost your debt payoff progress (since lower interest = more chance to make an impact on that principal balance).
So how can you do it? There are a few options:
- Peer to peer loan
- Credit card balance transfer
- Home equity loan or line of credit
- Unsecured loan through your bank
If you choose a loan through peer to peer lenders, a home equity loan, or an unsecured loan through your bank, then you’re consolidating through an installment loan.
If you choose a balance transfer credit card or a home equity line of credit, then you’re consolidating through a line of credit.
Either way, obtaining a consolidation loan or line of credit is pretty easy. All you have to do is apply and, if approved, your new lender will pay off your old loans and you’ll pay your new lender.
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How to Find Out if You’re Eligible
Since a consolidation loan or line of credit requires you to borrow new credit, you will have to undergo a credit check by the lender. If your score or income are lower than their criteria, then you may not be approved. Unfortunately, there’s no way to know exactly what score you may need to be approved.
If you’re not approved, not to worry! You can improve your score by continuing to chip away at your debt. As long as you keep paying on your debt and making all of your payments on time, every time, then there’s a good chance your score will go up. Don’t forget to also check your credit reports at annualcreditreport.com at least yearly so you can discover and fix errors on your credit report should they exist. And remember – we all have more than one credit score – so don’t get too hung up on that number!
The Benefits of Credit Card Debt Consolidation
As mentioned above, there are lots of times that debt consolidation can work so, so well. First of all, lowering your interest rates means that more of your money will be freed up to go straight to your principal balance. The higher your interest rate, the more of your minimum payment will go to interest alone; and payment to interest makes zero impact on your total debt.
Bonus: if you achieve a consolidation loan or line of credit that lowers your monthly payment as well and you continue to pay the higher amount you were paying before, then you can start kicking that payoff into high gear!
Finally, if you have more than one credit card to pay off, consolidating them into one can make your life a lot easier. Taking multiple payments, balances, and interest rates off of your plate so you only have one to worry about will free the mental energy you need to get through your battle with debt. The psychological benefit this can have should not be underestimated. Remember, money is just as much about emotions as it is about numbers.
Things to Watch Out for If You Consolidate Debt
One of the biggest problems with credit card debt consolidation is that it doesn’t always require you to enter into a repayment plan. If you consolidate with a line of credit, such as a balance transfer credit card, then there’s no reason you can’t continue making the minimum payments every month.
Don’t do that! Those minimum payments won’t get you anywhere. Credit card minimum payments are designed to keep you in debt as long as possible – even balance transfer credit cards. If you obtain a balance transfer credit card, it’s up to you to create a payoff plan. If you don’t you could end up in a cycle of balance transfer credit card churning.
There are a few other ways credit card consolidation can be detrimental:
- Making purchases on a balance transfer credit card will change your payment structure as the purchase interest rate will almost always be significantly higher than the balance transfer rate
- If you don’t pay a balance transfer credit card off before the promotional interest rate expires, you could be charged retroactively for the remaining balance at the new, higher interest rate
- Whether you get a loan or line of credit, you won’t be required to close your old credit cards. That means you can continue to accrue debt unless you take it upon yourself to stop using the cards.
None of these things to watch out for imply that credit card debt consolidation won’t work for you. They simply imply that you’ll need a healthy dose of diligence to go with your consolidation.
How to Make Credit Card Debt Consolidation Work for You
A few small steps can make all the difference and turn credit card debt consolidation into the tool you need to finally make progress on your debt payoff. So if you decide to give this a try, here’s what you should do:
- Create a plan to pay off your credit card debt consolidation loan or line of credit. If it’s a loan, you simply have to keep making those monthly payments (though it won’t hurt to pay extra if you can). If it’s a line of credit, calculate how much money you’ll need to pay each month to pay it off before the promotional interest rate goes up. Make that your minimum payment – not what they tell you your minimum payment is.
- Create a budget and stick to it.
- Discontinue use of your credit cards immediately.
- Set aside a small amount of money each month to build an emergency fund (so you can do even more to prevent future credit card usage).
- Never miss a payment.
Follow these steps and you’ll be on a healthy path to debt payoff and future financial growth!
Is Consolidation a Legitimate Way to Pay Off Debt?
Since there are so many products and services out there promising to help you pay off debt, it’s pretty normal to become wary of all of them. Distinguishing the good from the bad isn’t all that easy sometimes!
Debt consolidation is a legitimate way to pay off debt. All debt consolidation really is is restructuring your credit cards into a new line of credit that will allow you to lower your rates and combine the debt into one. You’re not going into debt settlement, you’re not entering a debt management program. (And if someone tells you that you should or that you are, then understand that they’re not a true debt consolidation company.) You’re simply restructuring your debt in a way that will enable you to pay it off more efficiently.
Successfully paying off debt is all about strategy. Employ the strategy that works for you and remember – you have the power and the control to decide how you want to pay off your debt!
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