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How Credit Card Debt Consolidation Works

by Bruce Haring

Increasing credit card debt has become a disturbing phenomenon in the United States in recent times. When you end up using cards for myriad purchases such as paying for shoes, ATVs, flat screens, and/or luxury vacations without the means to pay it off, debt ensues. With an average interest rate of 13.70%, a credit card debt means that you may pay over $400, for instance, purely as interest even after making the minimum payments on your credit card.

Managing your credit card debt is critical because without active management of such a debt, you are likely to end up paying an amount that has snowballed beyond recognition.

There are a number of ways in which you can manage your debt, one of which is credit card debt consolidation. This method is more viable and advantageous compared to others, but it is paramount that you know what the process entails before you attempt to open this window. Let’s take a look at how credit card debt consolidation works.

What is credit card debt consolidation?

What credit card debt consolidation essentially means is that you can combine all your different debts into one monthly payment and pay them using a single loan. With debt consolidation, you can write one check every month rather than giving several to each of your creditors. There are a number of reasons why credit card debt consolidation can work for you:

§  It lowers your interest rates and thus, the monthly payments that you make become smaller.

§  Since you make only one payment per month, it reduces the chance of mistakes such as late payments or incorrect amounts written on those checks.

§  It saves you time and helps you clear your head.

§  It helps you pay off your debts faster by making it more manageable.

§  Credit card debt consolidation is one of the best ways to get out of debt while keeping your credit score protected.

How to consolidate credit card debt?

If you want to avoid dealing with multiple bills every month, there are different options in which you can consolidate your credit card debt:

  • Balance transfer: This means transferring various credit card balances to a single form of credit. Many credit card companies offer low-interest transfers or you can apply for a zero-percent interest balance transfer credit card (if you have a decent credit score). Such cards usually last for a limited time like 6-18 months, and all payments you make in this time period go towards lessening your total balance. However these cards often have a balance transfer fee (usually around 3%), and delay in payments can result in an increase of your interest rate.
  • Debt consolidation loan: You can secure a personal loan at a lower rate of interest and then merge all your existing debts into the new loan. This simplifies the payment system for you, and also lowers your interest rate as compared to the ones you are paying currently. You can also take a home equity loan if you own a property and use it as collateral for a loan at a lower interest. But make sure that you understand the risks well before signing the dotted line on these types of loans.

Things to Consider before Pressing the Button for Credit Card Debt Consolidation

  • Spend some time reviewing your credit reports since any errors may create an obstruction for you in your pursuit to qualify for debt consolidation.
  • Consulting a non-profit credit counselor is a judicious way to go about the process as he/she can help you explore all the options and make the correct decision.
  • Before you start consolidating your credit card debt, talk to each of your creditors to find out the exact outstanding balance on every account. Don’t forget to factor in any fees, taxes, etc. since this will help you determine the exact amount you need for the personal loan.
  • Check if your zero percent annual percentage rate (APR) applies only to balance transfers. In such cases, any new purchase on the card may be charged according to the standard APR—which can be a hefty amount that will add to your debt instead of helping you reduce it.

In conclusion, it can be said that consolidating your credit card debt is a simple and practical way of managing and paying off your credit card bills. However, remember that this is not without some risks; although it seems appealing due to the lower payments and interest rates, defaulting on these payments can cause you to be penalized.

You need to be particularly careful when considering a home equity loan. You may not want to put your home at risk like that. Analyze your financial situation carefully before you decide on a debt consolidation option to erase your current credit card debts.

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