Find a solution to lower your monthly payments and reduce or eliminate interest charges.
High interest rate credit card debt can be extremely problematic for your budget. As revolving debt, your monthly payments increase alongside your balances. And if you only make minimum payments, high-APR interest charges eat up 2/3 or more of each payment you make. As a result, you can pay diligently month after month and barely see a dent in the balances owed.
The advantage of credit consolidation
Consolidating credit cards allows you to reduce or eliminate the interest rate applied to the debt. This means more of each payment you make goes to eliminating the principal (original charges). This allows you to quickly eliminate your debt and regain financial control. Even better, lower APR also typically lowers your monthly payments, too. This allows you to get out of debt faster even though you pay less each month. It’s a win-win for eliminating credit card debt.
How credit card consolidation works
There are several different ways to consolidate credit card debt. We’ll go into each option below, but this is the basic gist of all consolidation programs:
- You combine multiple unsecured debts
- This can include more than just credit cards – medical bills, payday loans and personal loans can also be consolidated
- All of the debts are rolled into a single monthly payment
- Your goals is to achieve the lowest interest rate possible – the closer to zero, the better
- With lower APR, each payment you make is more focused on eliminating your actual debt
- It’s a good idea to stop using your credit cards while you work to eliminate the consolidated debt.
- Once consolidation is complete, you have a clean slate and usually have a higher credit score, too.
3 Options for Credit Card Consolidation
#1: Using credit cards to consolidate debt
It may sound odd, but the solution to your credit card debt may be to get another credit card. A balance transfer credit card allows you to move balances from your existing credit cards to a new card. If you have a good credit score, you can qualify for a card that offers 0% APR over an introductory period. This usually ranges from 6-24 months and longer periods are better.
Once you transfer the balances, your other credit cards have zero balances. So you only have to pay off the consolidated debt without worrying about interest charges. The goal is to pay off the debt in-full before the introductory period ends. Otherwise, the APR will jump back up and you may be back to struggling to eliminate the debt.
When does this solution work the best? This solution is best used when you have a lower amount of debt to consolidate and a high credit score. If you have excellent credit you should be able to qualify for 0% Apr for 24 months. This would allow you to pay off $15,000 or less in-full with payments of less than $700 per month.
#2: Taking out a personal debt consolidation loan
Another option you can use to consolidate credit cards is to take out a personal debt consolidation loan. This is a traditional loan you apply for through a financial institution like a bank, credit union, or online lender. You get a loan for an amount that covers all of the debts you want to pay off. The interest rate is based on your credit score. You select a term that offers fixed monthly payments you can afford on your budget. Generally, you want the term to be 5 years (60 payments) or less to be effective.
Once you’re approved the money is disbursed to your creditors. In most cases, the lender will pay your creditors directly based on the balances you had during the underwriting process. This zeros out the balances on your credit cards, leaving only the loan to repay.
When does this solution work the best? This solution works when you have a good credit score and too much debt to eliminate effectively on a balance transfer credit card. Although the loan won’t offer the advantage of 0% APR, with good credit you can typically get approved for APR at less than 10%. Most loans change from 24 to 60 months, so you’re out of debt in less than five years.
#3: Enroll in a debt management program
The final option for debt consolidation is meant for borrowers who have:
- A low credit score
- Too much debt to eliminate effectively with a loan
You enroll in the program through a credit counseling agency that administers the program and negotiates with creditors on your behalf. It’s like an assisted form of consolidation that you can use when you can’t consolidate on your own. Even if you have rock-bottom bad credit, the agency can get your creditors to sign off on reducing or eliminating the interest charges applied to your debts. Creditors are more willing to negotiate because these agency have proven records of helping others to get out of debt.
To enroll, you start by consulting with a certified credit counselor to evaluate your debts, credit and budget. Counselors are required to review ALL options and only recommend a debt management program if it’s your best option; these agencies are nonprofit, so they’re regulated closely. If it’s your best choice, you enroll through the agency. They find a monthly payment that works for your budget and get your creditors to sign off on the adjusted payment schedule. They also negotiate to reduce interest rates and stop penalties. Programs typically last 36-60 months.
When does this solution work the best? It’s best used when you have high debt or a bad credit score. You must have at least $5,000 in debt to qualify. There is no credit score requirement. If you have good credit, look into DIY options first. Enrollment in this program freezes your credit card accounts and prevents you from opening new ones until you complete the program. Of course, depending on your situation, a freeze may not be a bad thing if you’ve developed credit dependence. It’s a good way to learn how to live credit free.