Are you heavily indebted to your credit cards? When a credit card payment approaches the due date, do you internally die a little?
It's not just you.
The average American owes 5,315, and the average credit card has an APR of 16.28% . Life seems prohibitively expensive when you factor in the cost of a car, insurance, tuition, and other miscellaneous expenses.
Do you ever wish there was just one bill to track down?
With the right debt consolidation program, it is possible. Here is everything you need to know about credit card consolidation.
What Is Credit Card Consolidation?
Consolidating debts is one of the most popular strategies for dealing with credit card debt. What this entails is the consolidation of many credit card accounts into one. That debt could be a loan or credit card balance.
When you consolidate your debt, you take out one large loan to pay off all your existing debts, such as loans and credit card balances. This means you'll have fewer bills to pay each month.
It's important to remember that debt consolidation loans can have more onerous terms and conditions, including higher interest rates and additional fees. Check the interest rate and monthly payment for a debt consolidation loan to make sure you'll save money.
Most Prevalent Type of Consolidation Loans
Debt consolidation can be accomplished in several ways, but the two most typical are getting a loan to pay off your existing bills and using a credit card with a balance transfer option.
Debt consolidation loan
A debt consolidation loan is an installment loan, meaning that repayment occurs in equal monthly installments over the loan's whole term. You need regular income and acceptable credit to be approved for a debt consolidation loan. A credit score of 740 or above is often required to qualify for the best interest rates.
Balance Transfer Credit Card
Those with strong credit may be eligible for a balance transfer credit card with a 0% APR introductory term lasting anywhere from 12 to 21 months. You can consolidate all your bills into one card and use the introductory period to pay off the balance without incurring interest.
Remember that the standard APR will kick in after the promotional APR period ends. It's also important to keep in mind that these credit cards often charge a balance transfer fee of between 3% and 5% of the transferred amount for a $5 fee. If you're only looking to consolidate a modest debt, any savings you realize may be outweighed by the balance transfer cost.
What Is The Purpose Of Credit Card Consolidation?
The purpose of combining credit card balances is to:
Reduce your credit card's annual percentage rate (interest rate) to save money on interest charges
Maintain a centralized repository for all your debt information
Have fewer bill's due dates to remember and reduce the chances of forgetting
Negotiate more favorable repayment arrangements
Cut down on the total payback time
How Does Credit Card Consolidation Work?
The standard procedure for obtaining a loan to consolidate debt is as follows:
Compare interest rates from multiple lenders to ensure you're getting the best deal
Prepare a loan application and submit it
Give the lender everything they need to verify your employment, income, and bank accounts
The lender will review your application, credit history, and supporting materials
Loan applications are subject to approval or denial by the lending institution
If the lender agrees, they may settle your debts on your behalf. A lender may provide funds to your bank account or a line of credit, and you may be responsible for making payments to the lender
When And Where To Apply For Card Consolidation?
Here are situations when credit card consolidation is considered a smart move
You are not spending more than half of your monthly take-home pay on your rent or mortgage
It's safe to assume that you'd be approved for a credit card offering a 0% APR or a low-interest loan for consolidating your debts
Your cash flow constantly covers your debt obligations
You can repay the consolidation loan in as little as five years
A consolidation plan might be a beacon of hope for many people.
Suppose you borrow money for a set period of three years. In that case, you can plan accordingly and know that the debt will be eliminated when that period has elapsed, provided you keep up with your payments and keep your spending under control.
In contrast, if you only pay the minimum on your credit card balance each month, it could take months, if not years, to pay it off, and you'll pay more interest than the original balance owed.
So, paying off your credit card debts with a debt consolidation loan might help you gain financial stability and independence. But it isn't the best option for people with severe debt problems. Think long and hard about taking on additional debt to pay off existing debt.