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Is there truly anyone out there who likes or needs the stress of managing multiple credit card payments? No, not likely.
You risk missing or making a late payment, assuming you don’t have automated payments set up, and it’s really just not necessary.
Imagine having one payment instead of multiple ones each month. That’s what credit card consolidation can do for you. But understanding what debt consolidation is and who it’s best for, isn’t always obvious.
Truth is, there’s no single best way for everyone to consolidate their credit card debt. The right answer for you is very dependent on your personal situation. Luckily, there are non-profit credit counselors available to answer your questions and help choose the solution that is best for you.
It’s definitely a good idea to do some of your own research to form your own idea of what suits your situation, and here are five tips to help you get there.
1. Know Your Options
Here is an overview of the three main debt consolidation options.
Personal Debt Consolidation Loans
Personal loans might not seem like a good option for getting out of debt, but they can be your saving grace. Credit cards usually offer a variable interest rate, which means it can change throughout the lifetime of the card. Personal loans generally have a fixed rate which means you know exactly how long it will take to pay off with consistent payments. Payment plans for loans are generally between three and five years vs. varying repayment lengths with those variable rates.
The key to a personal loan being your best option is the interest rate being lower than those of your interest cards. If you’re already paying a 20% interest rate on your credit card, taking out a personal loan with an interest rate of 25% makes no sense. Shop around to other potential lenders to make sure you get the lowest rate possible. Keep in mind that the better your credit score is, the lower rates you’ll be offered.
A word of caution though – stay away from lenders who will give you a loan regardless of your credit score or charge outrageous fees.
If your credit is stellar and you qualify for a new card with a lower interest rate, consider transferring the balance from your current credit card to the one with low interest. This not only saves you money on higher interest, but you’ll save if the multiple cards all have annual fees to keep them open.
For those who earned the “good credit score” badge, look for credit cards that have 0% APR for an introductory period that lasts up to 18 months. You’ll end up releasing yourself from interest, so you’re only paying off what you owe.
Debt Management Programs
Alright, so you might be having some trouble paying your debts down at all to the point you consider yourself in “severe debt.” Enrolling in a debt management plan means you’ll have some additional support to help you know any options that are available. You’ll find these programs through various agencies and companies that work with individuals who have fallen in the hole of debt and can’t get out.
Three benefits of these programs are:
- Making a single payment, then the company makes the other payments on your behalf.
- Lenders may lower interest rates after enrollment.
- Plans last three to five years.
2. Check Your Credit
Regardless of which option you choose in the end to consolidate your credit card debt, the first step you should take is checking the accuracy of your credit report. You’ll want to run through this report with a fine-toothed comb. The slightest error could keep you from getting the best solution available for you, so if you find errors, dispute them.
You can get a free credit report from all three credit reporting agencies: TransUnion, Equifax, and Experian. Knowing this information and verifying it’s correct is the main piece of information you’ll need to find a debt consolidation plan that works in your best interest.
3. Grab Your Calculator
It’s time to create a plan and do some math! Opening a credit card that has 0% APR for the introductory period might seem like the best answer, BUT you need a plan for it to be effective. You’ll want to add any balance transfer fees you’ll get when transferring your debt to that card, then divide the total amount (balance + balance transfer fee) by the number of months in the intro period. If you can’t commit to paying that amount each month, consider other options.
Loans have some fees associated with them too. Loan origination fees are a cut that the lender takes off the top immediately. For example, if your loan origination fee is 2% and you borrow $10,000, you’re really only getting $9,800. That’s $200 you’re borrowing but will never see! That’s only one example, so ask about ALL fees you’ll be paying from ALL lenders you consider.
Whether it’s payments on a personal loan or new credit card, stay on top of those payments. Any late payments or failure to pay will ding your credit score in a bad way.
4. Credit Scores
Alright, so you just got approved for a new card that can handle all of your credit card debt, AND it has an introductory 0% APR offer for 12 months. Sweet! You open the card, transfer all the balances, close the old cards, make a couple payments, then notice your credit score went down. What happened!?
If you’re maxing out a new credit card to consolidate all your debt, your credit utilization just got flushed down the toilet. The amount of credit you have available is a huge component (30%) that’s considered when your credit score is calculated. This means having one credit card with no available credit can be worse than having three cards that keep some of your credit unused.
When you’re opening a new card to transfer outstanding balances to, don’t close the old ones. Closing those cards decreases your available credit and decreases your credit utilization, which means your credit score suffers. Keep the card(s), and commit to making one small purchase each month to keep it active.
If you’re in “severe debt” and choose to enroll in a debt management program, you’ll likely notice a drop in your credit score. Once your plan has been fulfilled, credit agencies can re-evaluate your credit score. The best way to get back in good standing is to always pay on time. It accounts for 35% of your credit score.
Also, don’t be shocked if you notice a drop in your credit score after opening a new line of credit to consolidate your existing debt. The average age of each line of credit is another piece of information that’s considered when your credit score is calculated. This is another reason that closing your old credit cards will cause your score to drop.
The last thing you should know about your credit score is that mixing it up is a good thing. Rather than opening a new credit card to compile outstanding balances in one place, look at borrowing a personal loan instead. Having a variety of credit types is a positive mark on your credit report.
5. Commit, Commit, Commit
Whether you do your own math, work with a non-profit credit counselor, or enroll in a debt consolidation program, it’s important to have a plan and stick to it. Your debt is not going to pay itself off without your commitment to honor your repayment plan. This type of commitment literally pays off and soon you will be free from debt stress.
Christine Yaged is a co-founding partner and Chief Product Officer of FinanceBuzz. Christine launches and scales brands. She is passionate about technology, digital marketing, and people.