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Having too much credit card debt can make your situation more stressful. In turn, you may try to find alternatives that may free up some cash monthly, as well as get rid of your debts quicker. One option many are turning to is consolidating their credit card bills.
Here is a look at when you should do it:
If you have high interest rates on one or more cards
If you have a good credit score, there’s no reason you should pay high interest rates. Instead, look for an affordable loan that can consolidate your debt onto one account. By doing this, you could save some money and pay off your bills quicker. For example, if you are paying on a credit card with a balance of $5,000 at an interest rate of 15 percent, and you can receive a loan for that amount for 8 percent, you almost halve the amount of interest you will have to pay. As a result, it will allow you to tackle your principal more with each payment, thereby allowing you to pay off the bill faster.
If you want to lower your minimum payments
Many times you can save cash monthly by consolidating. If you are making payments to multiple creditors, your amounts will vary monthly. Meanwhile, by rolling all of this debt into a low-interest loan, you will only have to make one monthly payment, which could save you money.
While credit consolidation does offer some benefits, it’s not for everyone. Here is a look at some reasons why you shouldn’t consolidate.
Don’t consolidate without first speaking with your lender
If your account has a high interest rate, speak with your creditor to see if they can lower it. They may be willing to lower it as a way to keep you as a customer. Your goal first should be to see if your lenders can offer more favorable terms; if they cannot, then think about consolidation.
The reason for this is simple. Many do not know that when you transfer a balance from one creditor to another, that new lender may request you close the old account. This can affect your credit score negatively, as one of the factors in determining your score is length of accounts. Therefore, keep this in mind before doing it.
If you can’t afford your monthly payments
It’s easy to fall behind on bills, and if you have, you might be tempted to transfer your balances to give you some time to catch up. The only problem with this is you are trying to solve a long-term problem with a short-term solution. If you have problems making payments, speak with your lender to see if they can help. Additionally, you can consult a credit counselor, who will help you develop a budget; that way you can develop good financial behaviors. You could also contact a debt settlement firm for help lowering your debt.
To take advantage of balance transfer rates
Many credit card issuers offer teaser rates, which is where they promise a lower interest rate if you transfer your balances to them. The only problem with this is the teaser rate is temporary, and depending on your credit, after that term expires your interest rate will increase. While these are not bad programs, be sure to understand all of the terms before committing to one.
Rolling all of your debt into one payment can be beneficial if it‘s the right solution for you. By developing a budget and understanding your options, it can help you determine whether this is the best course of action for you take.
About Guest Author
I consolidated my credit cards years ago when I was in massive debt. Thankfully I used a very reputable company that really helped me get out from under the debt. That would be my main suggestion…find a company you can trust.
John S @ Frugal Rules recently posted..Even More Blogging Tips From a Beginner
I completely agree John.
One thing I did back about 5 years ago was consolidated a few thousand dollars on a cash out mortgage refi that saved me from paying 12% interest on a credit card. On top of that the interest is tax deductible, but you will need to have a fair amount of equity in your home to do it
Chris @ Stumble Forward recently posted..How Much Does Lifelock Cost – Why It’s Worth The Money
That is an ok option, but aren’t you just putting a few thousand dollars onto your mortgage and then paying for it for 15-30 years? I think you would end up paying more unless you planned on paying down your mortgage quicker.
That’s true but it was never my goal to live in that particular house for a long period of time and once we sold the house the mortgage was paid in full. If it were my current house I probably would have never done it since I got a 3.5% interest rate on it.
Good point. I have thought about doing a no-cost refinance because we plan on moving within the next 2 years. I am still deciding.
We consolidated our credit card debt when we developed a plan to become debt-free. It was definitely worth it in our case but it is not for everybody.
Deacon @ Well Kept Wallet recently posted..Get Paid to Lose Weight
Glad to hear that it worked for you Deacon. There are many things that aren’t for everyone, but doesn’t mean you can’t try them for yourself.
We consolidated our credit when we refinanced our mortgage 8 years ago at 3.5% interest rate. The trick is to remember to put the credit cards away once you do that.
Tackling Our Debt recently posted..5 Popular Small Business Ideas
So true Sicorra. If you continue to use the cards, then you are doing nothing with the consolidation.
Greg consolidated his debt on a 0% credit card when we started dating. I don’t think there is anything wrong with it if you are doing it for a reason that is constructive!
Holly@ClubThrifty recently posted..My Escape from Hotel Hell
Spot on Holly!
I would recommend a 0% consolidation if possible, unfortunately it is not an option for most people looking to consolidate. Make sure you do it via a good company and don’t pay dodgy upfront fees.
Pauline recently posted..13 money resolutions for 2013: #6 crush your debt!
That is good advice Pauline. Thanks for stopping by to comment.
I agree with Pauline not to pay and dodgy upfront fees as that might be a red flag. I have talked to some people that have consolidated there debts but the problem is they continue to spend. They seem to forget the money hasn’t disappeared and even though a payment may be less having them combined the money is not gone. Hide the cards!
Canadian Budget Binder recently posted..Get Out of Debt First, Then Focus on Saving
I put all of my cards but one in a different wallet and that helped me not use them. I wanted one for emergencies, but I never had to pull it out. You can’t get ahead if you keep spending!
Great post! I consolidated our cards twice when I was trying to pay off our credit card debt. I found that some of the transfer fees were worth it when switching to a 0% card, and it helped us pay it off faster.
Best,
Cat @ BudgetBlonde
Cat @ BudgetBlonde recently posted..The House Or The Vacation: Your Questions Answered
That is similar to what I did. I played the balance transfer game with my cards in order to follow 0%.
I really liked this post. I know that so many people struggle with credit card debt and the interest can be a killer. Hopefully this post helps some of them.
Glen @ Monster Piggy Bank recently posted..MPB – Pool Room Posts #12
I am glad you appreciated the post Glen. Thanks for stopping by to comment.
Great advice! I especially value the advice to call your lender first. More and more it seems that if they know you’re leaving, they may make a move to keep you there.
AverageJoe recently posted..Average Joe’s Friday Read-a-Long
Thanks Joe. I appreciate your feedback. I hope you have a great weekend.
I have never consolidated credit cards, but there seems to be many positives to doing so. It looks like credit card companies are hungry for balance transfers, and if you can get a lower interest rate why not do it?
DC @ Young Adult Money recently posted..Why Living in Hawaii Sucks
I played the balance transfer game many times during my 4 year payoff. It worked well for me, but it was not a formal consolidation plan.
I’m a big fan of debt consolidation as an option for helping to pay back debt. However, it can be risky if you haven’t changed your behavior that led to the spending in the first place.
Alex recently posted..Happiness Experiment 38: Nasal Strips Conclusions
Great tip Alex. If you don’t change your habits, then any type of debt settlement will not help you.
It’s always something to consider but you have to take into consideration the effect it may have on your credit score and how that may boost premiums on your mortgage etc. Nice round up though!
Chris@The Money Blogger recently posted..How to grow your business in 2013
Very true. You have to consider many things when you start dealing with debt consolidation and other forms of debt management.
If you are falling behind on payments it may be too late to consider a consolidation. Late payments depress your credit score, and may be caused by a disruption in income: job loss, disability, etc.
Lenders may decide that you do not meet their underwriting criteria if you wait too long.
People should consider opening a home equity line of credit while they are working and healthy. They can tap into the money when needed for consolidation – without showing viability.
Kevin @ Credit Bureau Insider recently posted..How Many Credit Bureaus are There in the United States?
Great point Kevin. What would be the solution if they can’t get a HELOC due to the loss of equity in most homes these days?
The following will not be the most popular opinion but I consolidated my credit card debt by taking out a 401K loan. It was a much better interest, and a much shorter term. There are lot of cons to doing this but also there are some great pros. In the end, it was the best move I’ve made in paying off my credit card debt.
Aloysa @ My Broken Coin recently posted..What No One Ever Tells You About Costa Rica
I wouldn’t recommend it, but if it worked for you then that is all that matters. It is only a “general” rule of thumb to not do a 401k loan, but if you need that option, then that is why they are there.
Yes, consolidating credit card can be a great option to reduce the debts. It has also psychological effect that means borrowers may feel free when they are not using multiple cards.