Are you worried about paying back your multiple credit card bills? Well, credit card consolidation can help you in this respect.
What is credit card consolidation?
Credit card consolidation is a process where you combine your multiple bills into a single monthly payment plan. It helps to simplify your financial life, but there are a few important questions worth asking before you make the final decision. Here are a few of them.
When should you consolidate credit cards?
Credit card consolidation is a good idea when you’re in the following situations:
1 You want to lower your interest rates:
Can’t pay 22% interest on your credit cards? Do you want to reduce it and save money? Credit consolidation is the right option for you in this situation.
2 You want to get rid of late fees and fines:
When you miss payments, creditors impose late fees and penalties after the grace period is over. If you enroll in a consolidation program, your late fees and fines will be waived off.
3 You can’t manage multiple credit cards:
Credit card consolidation programs and loans help you manage multiple bills like a pro. You have to make only single monthly payments. Isn’t it a good reason?
4 You want to improve your credit score:
Late payments, charged-off accounts, and past due accounts drop your credit score. Surely, you would like to improve it. Isn’t it?
What are the benefits of credit card consolidation?
1 Single payment plan:
With the help of credit card consolidation, you can repay your bills just by making a single payment every month. It is much easier to manage a single payment in comparison to multiple bill payments.
2 Right guidance:
You can get proper guidance from the credit counselors on how to manage credit cards. Plus, they can give you some tips to avoid credit card mistakes and lawsuits.
3 Fewer collection calls:
You can get relief from the debt collection calls. Credit counselors receive your debt collection calls and help you lead a stress-free life. They negotiate with the collectors on your behalf and solve your various queries.
4 More savings:
Credit card consolidation helps to lower your interest rate on your outstanding loans. Plus, it also eliminates late fees, fines, and penalties. This helps you save more in the long run.
How long does credit card consolidation take?
It completely depends on how you want to consolidate your credit card bills. A consolidation program may take between 3 and 5 years to pay off the balance in full. But what about a consolidation loan or a balance transfer credit card?
In case of a consolidation loan, much depends on its tenure. Suppose, if the loan term is 5 years, then it will take 60 months to get out of debt.
The teaser rate on a balance transfer card is valid for 12-18 months. If you can pay off the entire balance within 18 months, then you’ll be debt free within one and half year.
How can you consolidate credit cards on your own?
Check your credit utilization ratio
Calculate the credit utilization ratio on your credit cards. Pick the cards on which you have a high utilization ratio and list them on a piece of paper. Look at your credit card bill statements and calculate your outstanding balance. Divide this credit card balance by the credit limit. Multiply the figure by 100. The result is your credit utilization ratio.
Negotiate for a lower interest rate
Call your creditors and start negotiating for a lower interest rate on the cards having high credit utilization ratio. Explain you’ve been a loyal customer and so you deserve to get a better interest rate. If that doesn’t work, inform you’re in a financial crisis and can’t pay such a high-interest rate. Let them know that you want to pay off debt, but need their cooperation.
Fix a single monthly payment plan
Ask your creditors to give you an affordable repayment plan due to your current financial problems. Get everything in writing so that the creditor can’t change the terms and conditions of the new repayment plan later. Start making payments as soon as the new plan kicks in.
Other ways to consolidate credit cards into one payment
If you owe a huge amount on several credit cards, you probably feel you’re swimming in an ocean. First thing, you’re worried about managing multiple bills on time. Secondly, you may also be worried about having sufficient amount to make the required payments.
The best option to get the situation under control and save money is to consolidate your credit card debt where you’ll make one payment every month at a low-interest rate.
If this sounds like a melodious music to your ears, then read on to know how you can consolidate credit cards into one simple monthly payment plan.
Use a balance transfer credit card
This card helps you to combine credit card debt into one debt at a zero interest rate. The catch is you need to have a good credit score to qualify for one such card. The card offers 0% interest rate for 12 to 21 months. If you’re eligible for this card, then you get the opportunity to repay debt without paying interest.
2 Rules you need to follow
1) Calculate how much you have to pay
Calculate how much you have to pay every month to clear your debt before the introductory period ends. If you have to pay a balance transfer fee on the card, which varies between 0% to 5%, then include that fee in the total amount you need to repay.
How much to pay for balance transfer
If you’re transferring $15,000 onto a card with a 3% balance transfer fee and 15-month introductory period, then you need to pay $1030 per month. The breakdown of the calculation is given below:
Your total balance transfer fee is – $450 (3% of $15000)
So your overall outstanding balance is – $15000 + $450 = $15450
If you want to pay off the full amount within 15 months, then your monthly payment will be = $1030 ($15450/15)
When the promotional period is over, you have to pay the normal interest rate on the remaining balance. So do the calculations and commit yourself to repay your debt within the introductory period.
2) You can’t shop with the card
The second rule is that you can’t do shopping with the balance transfer credit card. The temptation is high. You can buy so many things at a zero percent rate. But don’t give in to temptations because that would be a mistake. If you want to use the card for shopping, use it after you have paid off the entire balance.
Use a credit card consolidation program
This is a professional service that helps you to pay off multiple credit cards with a single monthly payment plan within 3 to 5 years. The first part of this service is a counseling session where you can get a basic idea of the program. The counselors can help you determine whether or not the program is suitable for your financial situation. You can ask various questions, learn about the fee structure, and tenure of the program.
The second part of this program involves negotiation where credit counselors try to lower your interest rates. They call your creditors one-by-one and request them to reduce interest rates on your credit cards on the pretext of your poor financial condition. They formulate and set up a repayment plan that suits your budget and satisfies creditors’ need every month.
The third part involves making single monthly payments to the credit card consolidation company till your credit cards are paid off.
Use a credit card consolidation loan
This is another way to consolidate all credit cards into one payment. You can take out a consolidation loan at a low-interest rate to pay off your existing debts. Obviously, you won’t get a loan at zero percent interest rate. But the rate will be less than what you’re paying on your credit cards. The best part is you would get a fixed interest rate.
Browse all the comparison websites to know which lender is giving a loan at the lowest interest rate. You can also contact your bank to know if you can qualify for a loan at a moderate interest rate.
Most lenders will give you a loan at the best rate when you have a good credit score. But what if you don’t have a good score? Well, in that case, you have to approach other lenders. Some lenders give more stress on other factors like your monthly income, debt-to-income ratio, and employment. So if you have a regular source of income, you may qualify for a loan at a reasonable interest rate.
For some people, the best way to consolidate credit cards is to enroll in a program. For some people, a loan is the best option because it helps them to pay off credit card bills instantly. The choice is yours. Think about how to ‘consolidate all my credit cards’ without hurting your financial life. Think wisely and then make an informed decision.
Is credit card consolidation bad for your credit score?
Payment history constitutes 35% of your FICO score. So when you start making payments on time, it helps to build a positive payment history. This helps to boost your score.
Credit utilization ratio has a big impact on your credit score. It constitutes 30% of your FICO score. Credit card consolidation helps to improve this ratio and your score simultaneously.
Suppose you take out a consolidation loan and pay off the outstanding balance on your credit card. Previously, you owed $3000 on Capital One and $2000 on Bank of America credit cards. Now, you borrow a consolidation loan of $5000 and pay off both the cards instantly. The credit utilization ratio on these 2 cards drops to 0 percent and that helps to pull up your credit score.
How can you consolidate credit cards safely?
1 Stay low-profile:
Maintain a low balance on your credit cards to avoid additional interests, fees, and fines. Always make payments on time to build a positive payment history.
2 Catch up:
Check your credit card bills every month and find out if your creditors are receiving payments every month. If you have taken out a balance transfer card, then calculate how much more you have to pay every month to clear your dues within 12-18 months.
3 Read the clauses:
Be it a consolidation program or a loan or a balance transfer card, read the terms and conditions of the written agreement carefully. Read the fine print to know if there are any hidden fees.
4 Don’t open too many cards:
A single and an affordable repayment plan often makes you forget about your debts. You may get tempted to open new cards for covering your expenses. But this is a wrong move since it increases the risks of accumulating debt.
How much does it cost to consolidate cards?
1 Consolidation loan:
In case of a credit card consolidation loan, you have to pay an origination fee, which is 1% to 5% of your overall loan amount. Apart from this, you have to pay an annual fee for a home equity loan and this fee can go up to $50 in some cases. But you’ll save a lot on the interest since it’s usually between 4% and 8%.
2 Balance transfer card:
When you do a balance transfer, you have to pay a fee that’s equivalent to a small percentage of your overall balance. The fee is usually between 3-5% of the total balance. You have to pay off the entire balance within the promotional period to enjoy the flat 0% interest rate. In addition to that, a late payment during the introductory period can cost you a lot of money.
3 Consolidation program:
You have to pay only a monthly fee to the company. There are no upfront or advance fees.
How to know if it is suitable for you
Credit card consolidation is a suitable option in these 5 situations:
- You are struggling to repay multiple bills
- You want to pay off debts in full
- You want to repay debts relatively faster
- You want to repay multiple bills through one payment
- You want to improve your credit score