Help With Consolidating Credit Card Debts
- Cardholders have a few options for how to consolidate their credit card debts. One technique is to transfer small balances from credit cards onto a credit card with a high credit limit. This leaves all the debt on one credit card with just one monthly bill instead of a few separate bills. Another strategy is to take out a personal loan for the amount owed on all cards and use the loan money to pay off the cards. This usually secures a lower interest rate on the loan than the cardholder had on the cards. People who own a home might get a home equity loan instead because it has a better interest rate than a personal loan.
- One of the reasons that consolidation loans lower the monthly debt payments is because they might extend the repayment over a longer time frame. For example, say you have been paying $200 per month on one credit card and $300 per month on another card. You might get a consolidation loan that only requires a monthly payment of $350, which sounds like a monthly savings of $150. However, if the payments are spread out over a longer time, your total cost to pay off the debt will be higher. To save money, choose a consolidation loan that will pay off your credit card debts faster than if you had not consolidated them.
- Consolidating credit card debts might hurt your credit score. For example, if you transfer credit card balances to just one credit card and close the other cards, your total debt will remain the same, but you will reduce your available credit. This increases your ratio of debt to credit and lowers your credit score. Even if you keep the old credit card accounts, having the one card with a balance close to its limit will hurt your score more than if the balances were spread out. If you open a new home equity loan or personal loan, the credit inquiry and new account will both hurt your score in the short term as well.
- After consolidating credit card debts, do not use your now empty credit lines as a license to overspend. If you cannot trust yourself with credit cards, close the accounts or freeze the credit cards to force yourself to think before using them. If you consolidate debt with a secured loan, such as a home equity loan, budget carefully to ensure that you can make the monthly payment. If you fail to make payments on a home equity loan, you could lose your home.