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Credit Card Debt Consolidation: Five Things You Didn’t Know

Credit Card Debt Consolidation: Five Things You Didn’t Know

Credit card consolidation can be a favorable option for individuals struggling with large outstanding balances across several credit card accounts. Having multiple cards results in several bills from multiple companies, and it can be a logistical nightmare to pay all of these bills individually every month. Moreover, multiple bills increase the chances that a mistake will be made when making a payment, and this can lead to avoidable late fees and additional interest payments. Individuals with multiple credit cards should, therefore, carefully consider the advantages of credit card consolidation.

Gather Information

Before the value of credit card consolidation can be considered, sufficient information must first be gathered so that a good decision can be made. Start by gathering together all paper bills and printing out statements from online banking accounts. It is also a good idea to obtain a comprehensive credit history report from a reputable credit agency so that all outstanding credit accounts can be identified. A recent bill should be obtained from each creditor listed on the credit history report. Since credit card consolidation aims to improve an individual’s finances in the future, it is also important to project future income and expenses so that credit balances in upcoming periods can be forecasted.

Understand Personal Needs and Limitations

Every individual has different circumstances that determine what decisions are best for their own situation. The value of credit card consolidation can, therefore, vary by a significant degree depending on income, outstanding debt, personal lifestyle, and other factors. Individuals should study the information they gathered about their financial situation to determine how much money they can afford to pay toward their credit card balances each month. The impact that monthly payments are likely to have on future debt should then be projected as accurately as possible. It is also important to honesty recognize personal limitations, such as a high potential for needing to take unpaid sick days for medical reasons, that could hinder the repayment process.

Reducing Credit Utilization

Increasing an individual’s credit score is one of the primary benefits of credit card consolidation. However, credit card consolidation must be done in the right way to ensure that credit scores are improved as much as possible. With an ordinary FICO credit score, 30 percent of an individual’s overall score is determined based on the total amount of credit that they are utilizing. When several credit card accounts are consolidated into a single account, the total amount of credit utilization will drop because fewer accounts and less unused credit will remain outstanding.

Minimizing Outstanding Balances

Although an individual’s total outstanding credit balance will not change after consolidation, balances can be repaid faster when the interest rates associated with a consolidated account are lower than the rates associated with the existing credit card accounts. As total outstanding credit balances come down, credit scores will improve. The interest rate, available credit limit, and outstanding balance of each credit card account must, therefore, be evaluated carefully to determine which accounts should be consolidated.

Be Careful with Cards Offering No Interest

Many credit cards offer no interest terms that can provide significant benefits. Unfortunately, many individuals neglect to read the fine print with no interest credit cards, and this can lead to significant trouble. Some credit cards with no interest charge high cancellation fees, and these costs will have to be paid when consolidating accounts. Moreover, some people choose to not consolidate credit card accounts with no interest, but this can be more expensive in the long run when the fine print says that interest rates will rise after a couple of months. Although keeping accounts with no interest can be advantageous, the total cost of these accounts must be considered when consolidating credit cards.

Use Caution with Credit Counselors

With millions of consumers deep in debt, an industry has formed around offering solutions to credit problems. Some credit counselors offer services that add genuine value through good advice and resources that make a difference. On the other hand, the credit counseling industry has a bad reputation because unscrupulous individuals often market credit counseling services that are nothing more than scams. When selecting a credit counselor, it is important to evaluate a prospective vendor’s reputation by looking at online reviews and checking with industry accreditation agencies. Individuals who investigate credit counselors before signing an agreement are more likely to get the results they seek while avoiding deceptive swindlers.

Consolidating in the Right Way

Credit card consolidation gets the best results when sufficient time is invested into researching the right decisions to make. Since every individual has different circumstances, determining the optimal approach to credit card consolidation is dependent on understanding individual needs and limitations. Good information and sufficient research are the foundation of making good decisions when consolidating credit cards. Individuals who consolidate their credit cards in the right way can minimize future interest payments while improving their credit history.

Top Debt Consolidation Options

Top Debt Consolidation Options

When your debt becomes unmanageable, it may seem tempting to simply avoid paying some creditors for a month or several months. This leads to late fees and increasing interest rates, and debts that are severely past due may be sent to collections. All collections stay on your credit report for seven years, and multiple collection accounts on your credit record will reduce your score. The best option for unmanageable debt is consolidation. These are a few legitimate ways to consolidate your debts.

Zero-interest Credit Card Balance Transfer

If most of your unmanageable debt is from credit cards, a transfer may be the best option. Balance transfers are ideal if you can pay off your debt within a year or less. Many credit card companies offer cards with zero-interest introductory periods. Plan on paying off most or all of the balance within the introductory period. With some cards, this period is as generous as 18 months but may be six or fewer months with others.

There may or may not be a balance transfer fee. Most credit card companies waive the fee during a promotional period. You simply transfer all large balances from high-interest cards to the new card, pay the same as you would toward the multiple cards each month in one payment on the new card and watch your balance drop. Avoid using your other credit cards while you pay down the new one. After you pay off your credit card debt, make a habit of paying off purchases after you make them. While this option makes your debt manageable, it does require a decent credit score. People who have a score of 640 or higher usually qualify for one or more zero-interest credit card offers.

Home Equity Line Of Credit

If you own a home and have a variety of different debts to pay off, a home equity line of credit may be the ideal solution. With this option, you borrow against the equity in your home. You are usually allowed a certain limit and can borrow up to that amount or less. You can usually qualify even if your credit score is not great since you are offering your home to secure the loan. However, offering your home as collateral also puts you at risk of losing it if you default. Be sure that you can make timely payments if you choose this option.

Debt Consolidation Loan

Many people confuse these loans with debt settlement. Settling debt involves contacting individual creditors, agreeing on a lower amount and paying it off. Debt settlement companies will do this for you for a fee. However, they pay off one account at a time. With a debt consolidation loan, the lender loans you a certain amount of money, which is usually enough to cover your existing debt. You use that money to pay off your creditors individually, and you pay the consolidation lender a specific amount each month.

This option eliminates the higher cost of paying toward multiple accounts with differing interest rates each month. Most consolidation loans have lower interest rates. You still need decent credit to qualify for a standard consolidation loan or a personal loan from a bank. The fixed installment payments make it easy to manage your debt each month. You should avoid incurring new debt while you pay off the consolidation loan.

Life Insurance And 401(k) Loans

You can borrow from some life insurance policies and 401(k) plans. However, there are usually fees for early withdrawals and loans. If you withdraw the funds completely, you may lose your coverage. If you take out a loan and cannot repay it, you will definitely lose your coverage. The interest rates are usually reasonable. For policies that were recently implemented, you may not be able to borrow much. Life insurance and 401(k) plans tend to have low cash values during their first few years of existence, and you can only borrow against the current cash value.

Tips For Debt Consolidation

If you plan to apply for personal or consolidation loans, keep in mind that inquiries can hurt your credit. Many online lending platforms only use soft inquiries, which do not significantly affect your score. Hard inquiries from banks lower your score temporarily, and multiple hard inquiries have a noticeable impact. If you must use traditional lenders, keep applications to a minimum, and plan on accepting an offer immediately. Also, do not use payday loans. These are only for short-term emergencies and should never be used as a debt consolidation tool due to the high interest rates and fees. You can also talk to a free credit counseling organization to discuss your consolidation options and choose the right one for you.

What Is a Debt Consolidation Loan?

What Is a Debt Consolidation Loan?

The words “debt consolidation” have been popular for a long time. That’s because it is a concept that has helped a lot of people get out of a bad financial situation. If you are unfamiliar with what the term exactly means, this is the place where you will learn more about it.

A debt consolidation loan is a loan that will be used to pay the debts that you currently have in full. You might wonder why you would take on more debt to pay your current debts. After all, it doesn’t entirely eliminate your debts.

It’s true that a debt consolidation loan will not eliminate your debts right away, but it will offer you several advantages. For example, you may have several liabilities. You are making monthly payments for your auto loan and your personal loans. When you consolidate, all of those loans will be paid in full. Then, only your consolidation loan will remain. Most likely, your consolidation loan will have a much lower interest rate than the rates on all of your other loans combined. This will mean that you will be making a lower monthly payment.

If you have several credit cards that are carrying balances, a consolidation loan would combine those into one, and you will be able to pay them off in a shorter amount of time. You can also do this with student loans and many other kinds of debt.

Secured and Unsecured Debt Consolidation

You have the option of obtaining a secured debt consolidation loan or an unsecured debt consolidation loan. Secured loans require that you offer something of value as collateral. Generally, the collateral is a house or it can be a car.

If you do not own a house or a car with enough equity, you may be able to qualify for an unsecured debt consolidation loan. It’s harder to qualify for these loans, and you may not be able to borrow as much as you need. Plus, the interest rate will be a little high, but these loans do have advantages. Although the interest rate might be high, it will, most likely, be lower than the interest rate on your credit cards. Another bonus is the fact that the interest rate is fixed, and this cannot be said of your credit cards.

Who Is a Candidate for Debt Consolidation?

Debt consolidation isn’t for everyone. Those who would benefit from it the most fall under the following description:

  • They have several debts
  • They owe at least $10,000
  • They are constantly being contacted by collections agencies
  • Their interest rates are extremely high
  • Their monthly payments are very high
  • They have trouble paying their bills on time every month

Obtaining Your Loan

If you are interested in a debt consolidation loan, the first thing you can do is approach your lending institution and apply. You must have a positive payment history with the lender in order to do this. In the event that your lending institution turns you down, you are free to go to a private mortgage company or private mortgage lender. You may be able to qualify with a lower credit score with these institutions.

You must be aware of a few things before you seek a debt consolidation loan. First, lenders are eager to give you the longest loan terms they possibly can. This would mean that you would be re-paying your consolidation loan for a longer period of time than it would take you to re-pay your other loans. In this case, you would be paying more in interest for the consolidation loan than you would for your other debts. So, make sure that you know exactly what the terms are before you sign anything.

To ensure that you are not making a mistake, contact each of your lenders and ask them how many years it will take you to have the debt paid in full. Then, make sure that the terms of your new loan do not exceed that time period.

A Few Drawbacks

Be prepared to see your credit score go down. When you consolidate, debts with a longer payment history are eliminated. This will leave you with a larger debt that is also new debt, and this means that you are now a higher risk for lenders. Further damaging your score is the fact that you have less credit available to you.

Finding Your Way toward Financial Stability

Debt consolidation will not end your financial troubles. The only thing that can do that is learning how to save and spend your money wisely. The Federal Trade Commission can help you do this by teaching you how to develop a budget, manage your loans and help you find reputable credit counseling services. These will be very helpful to you because if you do not learn how to handle your money responsibly, you will find yourself in the same predicament again.

Should I Get a Debt Consolidation Loan To Pay Off My Credit Cards?

Should I Get a Debt Consolidation Loan To Pay Off My Credit Cards?

Getting a loan to pay off high-interest credit cards is a big step. There are some advantages as well as some disadvantages. To make sure that a debt consolidation loan is the right option for you, check out this post before you apply.

The Secret of Debt Consolidation Loans

Lenders lure consumers in with colorful mailers and inspirational websites filled with success stories. They promise that you’ll pay down your debt faster, save money and receive fewer bills in your mailbox or inbox, which will make you happier. It’s all part of a marketing plan. These companies want to sell you something. A debt consolidation loan can easily cost you several thousand in interest and fees. Is it better to give your money to a handful of credit card companies or to one lender? Will you save anything, or would you possibly pay more with a loan?

Alternatives to Debt Consolidation Loans

Frankly, a debt consolidation loan may not be in your best interest. You’ll have another creditor and a long repayment schedule. There are other ways to lower your interest rates and get some of the perks that lenders promise.

  • If you want a lower interest rate, negotiate with your credit card company.
  • If you want fewer monthly payments, transfer your balances.
  • If you want to be debt-free by a certain date, create your own repayment plan.

Plus, as you pay down your credit cards or transfer balances, you’ll consolidate your debts and work your way toward fewer bills. Loans aren’t a first-line strategy for people who have high balances on a few accounts. They are a radical solution if you have substantial, uncontrolled debt. Here are a few things that will help you weigh the costs and benefits.

Loans vs. Your Own Repayment Plan

Before you resort to a debt consolidation loan, see if you can draw up your own repayment plan. Taking out a loan won’t necessarily help you pay down your credit card bills faster. Do the math.

With your current interest rate and monthly payments, how long will it take you to pay off your credit cards? How much will you spend on interest? To reduce these amounts, put more money toward paying off your creditors each month. There are a number of different strategies for paying off credit card balances and other debts.

Find out how much your monthly payment would be if you got the loan. Are you putting that much money toward your debts currently? If you aren’t and you can afford it, consider upping your monthly credit card budget. You’ll save money and become debt-free faster. On the other hand, if your loan payment and interest rate would be lower, you may still end up paying more due to the longer three- to five-year term.

The Debt Problem and Solution

Sometimes, debt consolidation loans are part of the problem, not the solution. These financial products don’t address the most critical part, which is determining why you went into debt in the first place and learning how you can stay out of debt in the future.

If you apply for a debt consolidation loan, stop using your credit cards. Cut them up, or keep them in your sock drawer. Don’t get in over your head. If you think that you might whip out the plastic at your favorite shop or restaurant once your credit cards are clear, a debt consolidation loan could get you into even more trouble. If you need help creating a budget and sticking to your debt repayment plan, call a certified credit counselor.

When Debt Consolidation is the Best Option

There are situations when debt consolidation loans provide much-needed relief and financial breathing room. If you identify with some of these statements, a loan is worth considering, but it still might not be the best solution.

  • Can’t get lower interest rates on your credit cards
  • Don’t qualify for hardship status
  • Are facing harsh penalties and late fees
  • Have too many bills and unsecured debts
  • Can’t afford minimum payments that are scattered throughout the month
  • Need breathing room to organize your finances and get on track
  • Will definitely save money with a debt consolidation loan

Financial Decisions

A debt consolidation loan is just one option to consider. Don’t lock yourself into anything before researching all of the possibilities. Check into balance transfers, debt management plans and different self-driven strategies to see which option appeals to you and feels like something that you could maintain on your journey toward becoming debt free.

5 Tips for Consolidating Credit Card Debt

5 Tips for Consolidating Credit Card Debt

Debt is a subject that’s on everyone’s mind. It causes stress, and it keeps people up at night. If you find yourself under a mountain of debt, it’s time to take control of your money. Consolidating credit cards, loans and medical bills is one way to lower your interest rate, pay down more of your balances and free yourself from financial burdens. Follow these five tips to find the best solution for controlling the debt monster.

1. Checking Your Credit History

As you consolidate your bills, you might apply for a new credit card or loan. Check your consumer credit report to see where you stand. Look for errors, and dispute incorrect information. You’re entitled to receive a free copy of  your credit report from each bureau every year. Take steps to lower your balances and improve your payment history before you apply for a loan or open a new credit card. You’ll earn favorable interest rates and better introductory offers.

2. Understanding Your Options

Today, there are many ways for consumers to consolidate their bills. Regardless of which option you choose, only work with a reputable company. Check reviews, and verify the company’s credentials with state licensing bureaus and the attorney general. Don’t do business with any agency that makes false or illegal claims. Here are three legitimate debt consolidation options.

  • Check your existing credit cards for balance transfer offers. These promotions let you consolidate balances at a lower interest rate. You can pay off multiple high-interest accounts, save money and have just one monthly payment. If your current credit cards don’t have any offers, it might be time to switch. Consumers with good credit can qualify for competitive promotions. However, subprime interest rates, low credit limits and large late fees can affect the viability of this option.
  • Debt consolidation loans are best for consumers with good credit. To save money, you need to qualify for an affordable interest rate. Personal loans can combine up to $35,000 in unsecured debt depending on your income. You can consolidate medical bills, auto loans, credit cards, student loans and other debts. You’ll have between three and seven years to repay the loan. A longer term will lower your monthly payments, but you’ll pay more.
  • Debt management plans (DMPs) are directed by local local credit counselors. You pay the agency each month, and your counselor pays your bills for you. These nonprofit organizations charge very little. Because they work closely with creditors, they can sometimes lower your interest rate. The downside is that the DMP will impact your credit score, and you won’t be able to open new accounts. DMPs are ideal if you have substantial unsecured debts that can be repaid in three to five years. These agencies offer free or low-cost counseling sessions if you need more advice.

3. Comparing Costs

  • Balance transfers can save you money, but most companies charge 3 to 5 percent. Check the APR and expiration date on all offers to avoid unexpected fees. Don’t make new purchases after you transfer a balance. That could void the promotion.
  • Lenders often add origination fees to personal loans. In some cases, interest rates are higher than credit card fees if you don’t have exceptional credit. Weigh these expenses as well as the potential benefits and drawbacks.
  • The average cost of a debt management plan is $25 per month. These agencies can lower your interest rates, so you’ll save money that way too. Above all, a debt management plan will help you to stay on track and avoid accumulating more debt.

4. Improving Your Credit

Debt consolidation will most likely affect your credit score, but you can start improving it immediately. Work toward getting your balances around 30 percent of your credit limit. Minimize loan and credit card applications. This will increase your chances of qualifying for better terms. You will also have more debt consolidation options. Learn about the factors that affect your credit rating so that you can develop an action plan. For example, a low-interest loan could improve your credit score gradually by diversifying your credit history.

5. Sticking to Your Plan

Whatever option you choose, you need to stick with it. Make sure that the plan is manageable and that you’ll have enough money to cover your debts and expenses now and in the future. Don’t overextend yourself. If the plan is realistic, you’re more likely to succeed. Track your decreasing balances. Cross goals off your list, and monitor your credit score to stay motivated. Climbing out of debt is like dieting. It’s not a thing that you do for a few weeks. It’s a lifestyle that you need to maintain. Once you’re out of debt, you can use your money to grow your wealth.

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