Many people today are dealing with debt. While they seem to live comfortable lives, they owe a lot to creditors. Some examples of these debts include student loans, credit card debt, mortgages, automobile loans, payday loans and more. When these loans get out of hand, they get you into big financial trouble. Paying them off one by one is a tedious, painstaking process. However, debt consolidation provides a quicker, less painful solution. Here is more about it and some advice on how to execute it.
Debt consolidation defined
Debt consolidation is a financial instrument which allows you to borrow one big loan to pay off multiple outstanding ones. It literally reorganizes your debt from multiple payments every month to a single convenient one. Debt consolidation loans take many forms. They include:
- Home equity loans
- Credit card balance transfers
- Homeowner’s Equity Line of Credit (HELOC)
- Personal loans
According to national debt relief sites, all these loans provide you with a lump sum of money which you can use to pay off everything that you owe.
Interestingly, your debt consolidation loan can have a lower interest rate than the average of all your debts combined. For example, your average credit card debt can have an average interest rate of 15%. After getting a home equity debt consolidation loan, you can pay off all your credit cards and begin servicing the loan at an interest rate of 4%. This helps you to save money on debt consolidation.
Credit card balance transfers
The credit card balance transfer can be used as a form of debt consolidation. It shifts your credit card debt from many individual cards to one card. The target credit card often has a lower interest rate than the average of your other outstanding ones. By providing debt organization, credit card balance transfers act as debt consolidation. Seeing as credit cards are notorious for causing debt, should you consolidate your debt using a credit card? Find out below.
Factors to consider before you use a credit card for debt consolidation
Your debt scenario
It is easier and more convenient to make payments for one credit card that many of them. However, you should begin by finding out how much debt you owe in total. Pick up all the credit card statements which you have and add up your debt. This will give you a clear picture of what you owe the credit card companies.
Having done that, proceed to estimate how much money you can realistically set aside every month to pay off your debt. This shows your financial ability. Last but not least, consider the low-APR (annual percentage rate) period of the credit card which you intend to use for debt consolidation. This period of time allows you to make payments at a low-interest rate. After it is over, the interest rises to standard levels for the debt consolidation card which you chose.
After finding out these factors, you will be able to understand how much money you can save on interest with the new credit card that has a lower APR and whether you can afford to make the monthly payments. Furthermore, you will be able to understand how long it would take you to pay off your entire debt after consolidation. This is your debt scenario.
Credit card consolidation can negatively affect your credit score
You can consolidate your credit cards into one manageable card with a low-interest rate. Leveraging the low balance can help you to save money and pay off your debt. While credit card consolidation saves money on interest rates, it can lower your credit score.
One of the factors that are used to calculate this score is known as credit utilization. It refers to the actual amount of credit that you are using and contributes 30% to your overall credit score. If you use any credit cards and pay them off in time, you can create high credit utilization. However, if you only use one, this factor reduces.
Credit card debt consolidation results in your utilization of one card. Therefore, it can negatively affect your credit score. This is an important fact to weigh before you decide to use this method of credit card debt elimination.
The 0% APR may only apply to credit card balance transfer
Upon transferring all your credit card debt to one card, its provider can quote a 0% introductory APR. This means that you get to pay off the new card at no interest rate at all for a period of time. This saves you a lot of money which you can channel into making larger payments and get rid of your debt quicker.
Seeing as the new consolidated card is still a credit card, you can use it to buy things. In this case, the 0% APR may not apply. As a matter of fact, the interest rate for the payments that you make after you make purchases with the card can soar. Therefore, make sure to ask the credit card provider if the 0% APR applies to purchases as well as balance transfers. The answer that you get is an important factor to consider as you make a decision on whether to consolidate your debt with a credit card.
Debt consolidation is one of the solutions which you can use to manage debt for the purpose of quicker payment. Credit card balance transfer is one of the forms of debt consolidation. It is important to consider the factors above before using this option.