Are you tired of carrying credit card debt? Do you want to know the best way to consolidate credit card debt? In this article, I will be sharing three strategies that you can consider so you can finally become debt-free.
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What is debt consolidation?
Debt consolidation is a financial strategy that combines multiple debts into one lower payment. You typically pay off all of your unsecured debts using a new loan. You will then make one monthly payment on your new loan. It is designed to help people who have a large debt load but are unable to pay it off all at once. Debt consolidation can reduce your monthly payments by getting a lower interest rate, allowing you to pay off your outstanding debt faster.
Is debt consolidation a good idea?
If you’re trying to decide whether debt consolidation is a good idea then you may want to start by looking at your overall financial life. It may be a good idea if you have trouble paying your bills, are uncomfortable with the amount of debt that you have, or are unsatisfied with the interest rates. Some of the advantages of debt consolidation include:
- Simplify payments: When you consolidate your debt, then you no longer have to worry about various monthly payment due dates. You will only have one payment to make on the same date every month. You will also know the exact amount to budget each month for your payment.
- You may repay your debt faster: Since consolidated loans can have a lower interest rate and have fixed payments every month with a clear beginning and end date, it can mean that your debt is paid off faster.
- Your credit score should not be affected or may increase if you pay off your debt faster: you will be paying off several loans with one larger loan so none of your debt agreements are being broken and your credit score shouldn’t decrease. If you do see a slight decrease at the start, this will be corrected over time as you make on-time consolidation payments.
What are the disadvantages of consolidation?
- Overall debt may increase: If you continue to spend more than what you make, then your overall debt may increase.
- There may be some additional fees: Sometimes when you consolidate there may be fees such as balance transfer fees and loan origination fees. Before taking out a consolidation loan, make sure that you check all of the fees, including late payment fees. If you end up with late payment fees then it could set you back even further.
- It won’t solve financial problems on its own: Consolidating debt can help you pay off your debt faster, but it won’t necessarily change your spending habits. Create a realistic budget for yourself and set up an emergency fund to help you avoid debt problems in the future.
Does consolidation ruin your credit?
Consolidation can raise or decrease your credit score depending on how you manage your consolidation. It may raise your credit scores over the long term if you pay off your debt. However, if you miss any payments or end up with more debt, then it may decrease your credit score.
What is the safest way to consolidate debt?
There are many ways to consolidate your debt. These include:
- Debt management program
- Credit card balance transfer
- Personal loan
- Peer-to-peer online lender
- Home equity loan or line of credit
- Retirement account loan.
It is best to speak to a financial advisor so that you can understand the pros and cons of each consolidation plan. A financial advisor can also help you create a long-term budget and create financial goals to help you stay on track.
Strategy number one: Do a 0% APR balance transfer.
This involves transferring the balance from your card to either an existing or a new card that has a 0% APR balance transfer promotion. What that means is, you’re not paying any interest for like 12, 15, or 18 months, whatever the promotion period is. I’ve seen a lot of people do this, but sometimes they end up where they started because they completely forget about paying this card off before the promotion ends, or they make minimum payments thinking since it’s no interest, minimum payments make the most sense. The main way this strategy can work is for you to keep paying off your card on a regular basis and make the payment high enough that the card will be paid off before the promotion APR ends. You’ll discover that you’ll be able to reach zero balance much sooner.
So you’re getting help, but you need to do the work. It’s like going on a trek to Machu Picchu for five days and you hire a bunch of porters to carry your stuff, but you actually still need to do the actual trek, seven miles a day for five days, and you’ll be happy when you finally reach your destination. Now, there are a couple of caveats to this strategy. It’s actually not completely free. You typically need to pay a 3%-4% balance transfer fee. And, typically you’ll need to have around 690 or 700 credit score for you to get the balance transfer approval.
Strategy number two: Get a fixed and lower interest rate loan, which you can use to pay off your existing credit card balance.
This involves getting a quote from online lenders, like SoFi or LightStream, there are several out there. The main reason this is a good strategy, or can be a good strategy, is if you can get a lower fixed interest rate, let’s say 10, or 12, or 13%. That’s typically gonna be much lower than the interest rate that you’re currently paying with your credit card, which is typically like 20 or 25%.
The way this works is, let’s say you add up all your credit card balances and it’s $30,000, you apply for a $30,000 fixed loan from an online lender. They give you, once you get approved, that $30,000, which you use to pay off credit card debt, and now you have a $30,00 fixed-rate loan, which hopefully is a lower interest rate. The reason I like this is that it no longer becomes this insurmountable debt because you can see the light at the end of the tunnel, you know you’re gonna pay it off in a set number of years.
I remember once when I was hiking at Yosemite National Park, I’m at the base of this mountain, I look up and I’m thinking, there’s no way I’m gonna reach this, it’s just too high. But, I just took one step at a time, which is what you’re doing when you make those fixed monthly payments. Before you know it, you’re at the peak.
Strategy number three: Implement a balanced budget.
Now, these strategies will really only work if you combine them with implementing a budget. If you have a boat that’s sinking you’re trying to fix the engine or lift up the sails, but you don’t fix the leak, the boat is gonna keep on sinking. You have to find a way to spend within your means, and several people have done that in different ways. Some have switched completely to a debit card. My favorite is having a separate second debit card that you only use for fun expenses like your Amazon, Uber, or takeout. Or you can also use an app to monitor your expenses.
Debt Consolidation Strategies
I hope these strategies helped you understand the best way to consolidate credit card debt. If you’d like more tips and tricks on how to implement a balanced budget, or how to save more money, make sure to check out our other free financial advice blogs. So that’s it my friends, three strategies that you can use to help pay off your credit card debt through a 0% balance transfer, try to get a fixed lower interest rate loan, and implement a balanced budget. Until next time.
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.
