Should I Consolidate My Credit Cards?

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What is it about credit card debt that makes it so much worse than other types of debt? I mean, all debt has moments of being tough to deal with…but none quite like the feelings that credit card debt can bring on. Besides being expensive (and often coming with unnecessary feelings of shame), credit card debt can be so darn stressful.

Other types of common debt, such as student loan debt, auto loans, and mortgages, all come with an end date. While it’s not exactly fun to be locked into the typically long repayment periods (especially with student loans and mortgages), at least you know for sure they’re going to be paid off as long as you stay the course. Not so with credit card debt.

Think about it, with an installment loan, as long as you pay the minimum on time every month, you’re guaranteed to pay the loan off. But if you do the same and make minimum payments on your credit cards, you could be facing endless years of debt. Not exactly intuitive, is it? So what are you supposed to do to pay off your credit cards? Many experts say you should consolidate them.

Why People Consolidate Their Credit Cards

Credit card debt consolidation can take on many forms but the the purpose remains the same no matter the form: simplify your payments and lower your interest rate or rates.

If you have more than one credit card to pay off, then consolidating them into one can give you peace of mind as you make one monthly payment instead of multiple. This also makes tracking your payoff progress much easier. Even if you have only one credit card, consolidating it at a lower interest rate allows more of your money to go to that principle balance than interest and gets you out of debt sooner.

It almost seems like there’s no reason to do it, right?

I’ve personally begun to view credit card consolidation as a great pre-plan method. In other words, consolidating and lowering your interest rates allows you to optimize your plan before you even get started – thus putting you on your best foot as you get started on your debt repayment strategy.

That doesn’t mean credit card consolidation doesn’t come without risk though. To minimize the risk, you’ll first need to discover the right consolidation method for you and create a financial strategy that prevents you from using credit cards moving forward.

How to Consolidate Credit Card Debt

Let’s talk about all the different ways to consolidate credit card debt. There are a few so get your notebook handy and jot down the pros and cons of each based on your specific priorities.

Balance Transfer Credit Cards
Often the the way to get the lowest possible interest rates, many people seek out a balance transfer credit card first when opting to consolidate debt. Here’s how it works:

You apply for a balance transfer credit card through your bank or a credit card company. If approved, they’ll offer you a low or even 0% interest rate for a limited period of time (usually for the first 6 months to one year). If you take the offer, they’ll pay off your other credit card or cards (depending on the amount you are approved to borrow) and charge you a balance transfer fee.

When a balance transfer works well:
A balance transfer can be a great debt payoff method…if you do these two things and stick to them diligently:

  1. Stick to a payment plan that has you paid off by the time the interest rate expires. You can calculate this by dividing the balance by the amount of months you have at the introductory interest rate.
  2. Never use the old credit card(s) and never use the balance transfer credit card for purchases.

When a balance transfer doesn’t work well:
If you don’t follow the steps above, a balance transfer could result in more debt. Here’s why:

  1. Any remaining balance when the interest rate expires could be charged retroactively at the new (often significantly higher) interest rate. Then you’ll be stuck looking for another balance transfer or trying to pay off the debt at a rate that may even be higher than you had on your original card(s).
  2. If you continue to use the old credit cards while paying off the balance transfer card, then you’ll be stuck in a never-ending debt cycle. And if you make a purchase on the balance transfer credit card, you’ll be charged a much higher purchase interest rate and your entire payoff could be skewed.

If you want to get the lowest interest rate possible, the balance transfer credit card could be a good option for you if you follow the to-do steps outlined above. If you prefer a method that takes you away from revolving debt in general, this may not be a good option for you.

Peer to Peer Lenders
Peer to peer lenders are companies that offer debt consolidation loans through a peer to peer borrowing and investing platform. Two popular examples of this are Prosper and Lending Club. These loans won’t come at the 0% or near 0% rates you may get with a balance transfer credit card, but they do come with a guaranteed payoff date.

How a peer to peer loan works is you apply for an amount that ideally will cover all of your credit card debt. If you are approved at a rate lower than you’re currently paying and decide to go for it, the peer to peer lender will pay off your credit cards and typically start a plan that has payments automatically withdrawn from your checking account.

These come at a higher interest rate than balance transfers; but they also come with less temptation. You can’t use the loan for anything else – though there’s nothing stopping you from continuing to use your old credit cards. Again, you’ll need to employ a diligent financial strategy to ensure that you’re not acquiring more debt while paying this debt off.

Peer to peer loans are not a good option for someone trying to get the absolute lowest rate possible. But they are a good option for someone looking for a guaranteed payoff date and a fixed interest rate.

DIY Negotiation with Your Lenders
A much less commonly used strategy, you could DIY your debt consolidation by negotiating directly with your lenders. I did this myself and was able to get my lenders to lower the interest rate on my credit cards.

How it works is you would call your lenders and ask them very directly to lower your interest rates. If you speak to them politely, explain your solid history with them (especially if you’ve always paid on time), and even tell them that you’re shopping around for better rates, they may accommodate your request.

This doesn’t always work. I called all three of my lenders and only one agreed. But the one that agreed offered me a credit card balance transfer (see option 1 above) at a 0% interest rate for 14 months. Unlike my first experience with credit card balance transfers, this one was enough to pay all three off and for a long enough period that I could feasibly pay off the card before the interest rate went up. I made a payoff plan, stuck to it, refrained from carrying a balance on my other cards, and managed to finally get rid of my credit card debt.

This is a good option for anyone! The worst thing that can happen is your lender telling you no. Then you can go back and try the options above if you want to consolidate your credit card debt.

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How to Ensure this is Your Last Encounter with Credit Card Debt

This cannot be stressed enough: whether you decide to consolidate your credit card debt or not (or no matter which consolidation option you choose), you have to make sure this is your last encounter with debt. That’s a lot easier said than done.

There are a million reasons we get into debt. It could be due to an investment (such as student loan or mortgage debt), poor spending habits, an emergency, a lack of sufficient income….the list goes on and on. No matter the reason you got into debt, there are a few things you can do to make sure you never get back into debt after you pay it off.

  1. Create a budget you can stick to
  2. Find ways to earn extra money so you can save more and pay debt off faster
  3. Save diligently to create an emergency fund (and only use it in true emergencies)

These solutions aren’t perfect. Things like a medical emergency can come on quickly and cost far more than the average emergency fund. But the more steps you take to protect your finances, the better chance you’ll have at weathering any financial storm that comes your way.

Image Credit: Philip Bouchard

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  • That’s the main problem I’ve noticed with people who have failed with debt consolidation. They view this as a solution, rather than just an organisation of their debt before they enact their actual solution.

    That said, I absolutely think everyone who has more than one credit card at a high rate of interest should consolidate (if their credit score allows) onto a 0% balance transfer whilst they are paying down their debt.

    • Shannon_ReadyForZero

      Absolutely – it’s definitely the step before the solution but can be a very useful one when handled diligently!