by Christy Bieber | Updated July 27, 2021 - First published on Nov. 27, 2018
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Consolidating credit card debt could save you money and simplify your life -- but how do you do it? Just follow this simple guide.
Anyone who owes money on credit cards knows this kind of debt can be hard to manage. Not only are interest charges typically high, but you may also owe multiple lenders and be forced to juggle several monthly payments. Consolidation is often the solution to make repayment easier, but you need to know how to consolidate credit card debt to avoid making a bad financial situation worse.
This complete guide will provide the answers you need to help you use debt consolidation to reduce interest and make debt repayment much simpler.
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Consolidating credit card debt involves repaying existing credit card debt by borrowing from a new lender. You can take a credit card consolidation loan to repay multiple existing creditors. Or, you can take a new loan to repay just one card with an outstanding balance.
The goals of credit card consolidation include:
You can also use credit card consolidation to lower your monthly payment. The amount due each month on your new loan often adds up to a lower payment than the minimum due from all your existing creditors. However, if it's financially feasible, you may want to continue making those higher monthly payments to pay down your consolidated debt faster.
When you start looking into your options for credit card consolidation, you'll probably come across loans that are specifically marketed as "debt consolidation loans." While this type of financing may, at first glance, seem to be what you're looking for, the reality is that these loans often don't have very favorable terms and they're sometimes scams.
Instead of taking a loan marketed specifically to people looking to pay off debt, you're better off exploring alternatives such as 0% balance transfer credit cards or personal loans. A 401(k) loan or a home equity loan may also be an option for your situation, but there are big risks to using these last two types of financing.
To find the right type of financing for a debt consolidation loan, there are a few key factors to consider when comparing loan options:
It may also be worth thinking about how quickly you can obtain the new financing to repay your old debt. It can take several weeks to be approved for a personal loan or home equity loan, but you may be able to get approved for a balance transfer credit card instantly and quickly move existing credit card debt to the new card.
You have four primary options to consolidate credit card debt.
There are pros and cons to each approach, but many borrowers find using balance transfer credit cards is the cheapest and easiest approach. The big downside of balance transfer cards is that your interest rate will jump up substantially after the initial 0% promotional period ends. If you can't repay your debt in full by that time, you should try to transfer the balance again or take another type of loan out to pay what's due so you don't end up paying a fortune in interest.
Consolidating credit card debt is worth the effort if you owe a lot of money on your cards because of the substantial savings consolidation can provide.
If you owe $4,000 on one card at 17% interest with a $100 monthly payment and $2,000 on another card at 24% interest with a $75 payment, you'd save $1951.47 in interest if you kept payments the same and transferred debt to a new card with a 3% balance transfer fee, 0% intro APR for 12 months and a 15% regular APR thereafter. It would take 39 months to repay the balance, which means you'd be paying interest after the promotional rate expired. If you transfer the remaining balance at the end of the promotional period to a new balance transfer card, you'd save even more.
Completing a credit card balance transfer is very quick and easy and the entire process can typically be done online. That's why it's worth figuring out how to consolidate credit card debt so you can stop paying exorbitant interest and move towards becoming debt free faster.
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