Credit Card Consolidation – A Definitive Overview

Credit Card Consolidation & Credit Card Debt Consolidation

“You don’t build wealth with credit card rewards and airline miles. You can’t beat the credit card companies at their own game.”
—Dave Ramsey, Financial Consultant

On to credit card consolidation – Picture this:  Mom and Dad just dropped you off on your chosen University, a potential home for the next four years. You’ve been given an access card and set of keys for your room, appropriate buildings, and cafeterias on campus. Then, as you are breaking in your new shoes on the way to class, you are approached with another card offer. And, this card that will give you access to anything…

In 2012, approximately 45,000 new college-affiliated credit card accounts were opened, according to CNN Money. The card companies are less likely to be found panhandling on campuses in recent years (due to the 2010 CARD Act), but the threat remains. With student loan debt also soaring high, what’s the difference in a little more debt to really live up those four years?

However you acquired your credit card debt, debt consolidation “allows borrowers to roll multiple debts into a single new one.” Hopefully, the new debt will also have a lower interest rate so money management and payoff is easier to attain.

Case Study:  Credit Card Debt

In an article on Bankrate, one horror story involves a New Jersey elderly woman who owed around $12,000 in credit card debt. Her bills slowly built up after charging her everyday expenses for a period of time, when she received a surprising call from a local debt collector.

The agent informed her that they were planning to take her home. The more threatening aspect of the call was that they wouldn’t agree to settle and they wanted her money immediately. Not surprisingly, she was unable to pay the debt.

While many states protect homes from debt collection, those on the other end of the phone know which buttons to push. They do their homework. They use public information to find out what’s yours and what you stand to loose.

But this can all be avoided.

Avoid Credit Card Temptations 

“I can resist everything except temptation.”
—Oscar Wilde, Writercredit-card-debt-relief

The temptation to use secured credit cards can be overwhelming, especially when you consider our have-it-now society. For those who haven’t gotten into debt, the best way to avoid such a curse is to simply avoid the temptation all together.

The first step in avoiding temptation is to set a credit-free budget. It’s difficult to live within your means and keep up with all of your friends, so plan accordingly to live within the budget that best fits you.

While there isn’t a single budget for everyone, there are some steps to follow to build your own plan. Some options may include reverse budgeting, pay yourself first or the 50-30-20 approach.

The second avoidance factor would be to know your limitations. Credit card companies only make money when you consume, so after your probationary period, they will most likely offer to raise your credit card limit.

While this raise can help your credit score (because your percentage owed will be less), if you continue to spend frivolously, it’s likely that you will only continue to spend too much and max it out again. Instead, do not accept the offered increase.

Next, simply avoid carrying a credit card. It’s fine to have a credit card for emergencies, but leave it home on those nights out. Avoid the temptation, set your limits, and stick to your plan.

For those who are using their credit cards for a particular perk, such as airline miles or gas points, only bring it for those occasions. If your card is most beneficial for gas, keep in the car and don’t use it elsewhere.

Finally, ignore new credit card offers. There is always a new and improved credit card with new and improved specialty offers. It sounds great to get 2 percent cash back or better airline miles, but there are always new incentives to keep you spending money after the low APR offer.

If you do end up taking this route, make sure to read the fine print. Those special offers will often mean high rates in the future. Only open a new card or transfer your balance if you can lower rates on the existing card and pay it off faster.

What’s the Best Way to Consolidate Credit Card Debt? 

“Never lose money.”
—Warren Buffet, Businessman

In addition to the quote above, some of Buffet’s best advice includes the following statement:  “Price is what you pay; value is what you get.” Notorious for buying consolidate credit card debtthings on sale, the businessman would remind others that losing money also happens when the price paid doesn’t match the value received.

So what is the best way to consolidate credit card debt?

Like many types of financial advice, consolidating credit card debt is often situational. For those who are really in the dark or simply not finding the best answer for their situation, a non-profit credit counselor may be the best option.

Should You Get a Credit Card Consolidation Loan? 

If you’re serious about paying off your debt, being able to consolidate debt can be best to pay off the debt entirely, but it’s harmful to use as a mere postponement plan. Make sure your debt is manageable when visiting your income and calculated necessary expenses.

For example, ask yourself if you can possibly pay off the debt in five years. If you are unable to do so, and your total unsecured debt is less than half of your gross income, it may not be the best option for you. Then, consider an option such as a prepaid credit card, which limits spending much like a debit card, but also builds credit.

Credit Card Debt Considerations 

“Better to go to bed hungry than to wake up in debt.”
—Old Proverb 

While debts can be emotionally painful, there are other methods everyone should know about credit card debt. How can you find credit card debt relief?secured credit cards

First of all, it’s possible to use your credit card without ever owing anything. Only charge what you can afford and avoid debt. As written on Credit, you should “use credit cards as a payment tool, not as a revolving debt instrument.”

Understand when a short-term loan is beneficial. If you absolutely need to spend a quick thousand, make sure your repayment time frame is also equally short. One example may be purchasing furniture for a new home, when cash isn’t available.

Make sure that you are tracking your expenses, because debt can occur like quicksand. Picture those tiny luxury items, like a soda at the gas station or breakfast on the go rather than at home—these small bills can mean big debts.

Debt greatly affects your credit score. It’s obvious that debt free is ideal, but for those with high balances, your credit score is also impacted negatively. As a general rule, make sure your available balance is less than 35 percent of the total amount.

When paying off the debt, make sure to settle cautiously and stick with a repayment plan. Limit your spending to basic needs, prioritize by interest rates in order of payback, and arrange a deal that is best for you to eliminate debt.

How to Pay Off Credit Card Debt 

“Interest works night and day, in fair weather and in foul. It gnaw’s at a man’s substance with invisible teeth.”
—Henry Ward Beecher, Speaker 

how to pay off credit card debtIf debt consolidation seems manageable, consider making a plan to pay off your debts on a timeline, such as 6- to 12-months. If it’s not possible to pay off the debt within a year, consolidation may not be the best bet.

If you can lower your interest rates by simply asking, consider calling up your credit card company, especially if you have a long-standing and good history. Simply call, begin a negotiation and request a lower interest rate.

If you believe you can change your spending habits, consolidation may be for you. It’s tempting to get a higher loan and use the excuse to give yourself some breathing room, but this is dangerous as it can simply lead to more debt.

Consolidate Credit Card Debt

  • Acquire a Zero-Percent Credit card

If you can find a secured credit card that doesn’t charge interest, usually for 12 to 18 months, transfer your other credit card over to it and plan to pay off the debts within that promotional period. This is manageable but requires good credit.

  • Personal Loan

Your local bank or credit union will offer you a personal loan, usually with a rate between 6 percent (perfect credit) and 10 percent, but possibly as high as 20 percent depending on the credit score. Again, if the numbers add up, this option for fixed installments could be a viable choice for debt consolidation.

  • Home Equity Line of Credit

Homeowners can take out a line of credit on the equity of their home to work on interest rates. These rates are generally low so that money can then be used to pay off higher debts. This could mean spreading debt over time, but it’s a low interest rate and generally safe, as long as payments are always made on time.

  • 401(k) Loans

For those with employer sponsored retirement accounts, a 401(k) loan may be an option. It’s generally frowned upon to take money from this account as it’s meant for retirement, but you are at least borrowing from yourself rather than someone else. However, there could be a hefty penalty if the loan isn’t repaid.

  • Life Insurance Loans

Much like the 401(k) loan, Life Insurance Loans aren’t ideal, but could work. You will have to pay interest for taking a loan against the policy, but there isn’t a specific deadline for payback. Borrowing against the cash value could be a bad decision because unpaid loans will be deducted from the proceeds of any heirs.

  • Cash Advance / PayDay Loans

Perhaps the most “unadvised option”, Cash Advance or PayDay Loans will give money to nearly anyone, without a credit check, but the rates can be anywhere from 200 percent to 1,000 percent repayment. If this feels like an option, it’s more likely that bankruptcy may be more viable for your situation.

What is Good Interest on a Personal Loan? 

Using a loan calculator like the one on Nerd Wallet could help you find out the specifics of your particular circumstances.

Generally speaking, the interest rate on an unsecured loan will be based on location and credit worthiness. The lender also plays a role in the amount, but the following chart will point you in the right direction when choosing a loan.

Credit Score Estimated APR
Excellent (720 – 850) 10.94 %
Good (690 – 719) 14.56 %
Average (630 – 689) 19.84 %
Bad (580 – 629) 28.64 %

Additional Tips to Consolidate Credit Card Debt 

“People usually wait too long to reach out to a credit counselor, because it’s human nature to try to do it on your own.”
—Gail Pridgeon, Credit Counselor 

By finding a local non-profit credit counselor, it’s possible to find the best solution for your situation. Much like buying real estate, there isn’t specific advice that is universally helpful, but credit counselors can investigate your particular situation and craft a plan of repayment for card consolidation loan

Most individuals get into debt because they are unaware of how to manage their money in the first place. Either they believe they will soon be in a better situation or they simply allow the money to build up over time.  Many folks are simply addicted to credit cards.

In addition, when consolidating a debt, there are other items to first consider:

  • Taking a new debt to pay an old debt is merely passing the problem to the future if the practices that built the debt aren’t corrected.
  • With fees and interest rates, these new loans could cost more than the old loans over time, so do your math before getting in further over your head.
  • If you’re only getting a new loan to improve your credit score, it’s possible your current situations may have hurt your credit in a way that the current loan’s APR will not be valuable in your situation.

Closing Thoughts on Debt Consolidation 

When considering credit card debt consolidation, make sure to do your homework and compare your options. The best loans are closer to 5 percent and it’s important to make a plan to pay off loans in 12- to 18-months when possible.

There are several options to find a method of debt consolidation, but not all of the options are truly beneficial when you weigh the pros and cons. Pay off as much of the loan or debt as you can upfront and try to negotiate your rates to save as much as possible in the long run.

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