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Dan Steadman

Financial Advisor, DCL

Credit Card Debt Consolidation

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Best Methods of Credit Card Consolidation

Credit card debts, while not requiring any collateral, affect the financial wellbeing of many Americans today. Since lending institutions have relaxed their policies, a lot have been taking advantage of easy access to money.

This, coupled with relatively low interest rates compared to the 2008 financial crisis, has resulted to a continuous increase in credit card debts. In fact, it is expected to continue on this trend for the next years.

What this means that most Americans, no matter how well-off they seem to be, have debts they are yet to settle.

Why do Americans have so much credit card debt?

Acknowledging that there are a lot of things beyond our control, credit card debts are not only a result of mismanagement. Here, we list the most common ways a person falls into debt and what you can do to avoid or address them.

A Lack of Savings

Despite being aware of the unpredictability of life, statistics show that 69 percent of Americans have a savings account balance of less than $1,000. What is more alarming is that 34% of those do not have any savings at all. This exposes them to sudden changes such as loss of a job and other emergencies.

Some of these people wake up every day knowing they are in great shape financially, then broke the next day. Unable to augment their income as quickly as they came across an emergency, they have to resort to credit cards.

That is only the beginning for them. Even after dealing with whatever crisis that came, a big debt that has already accumulated interests still exists. For tragedies not to hit you too hard, save at least three months’ worth of your budget.

Poor Money Management Skills

Money as a limited resource must be managed. Unfortunately, a lot of people lack this skill. Living in a very consumerist environment, they are easily enticed by “hot deals” and other forms of marketing. We are pushed to think that we can afford things we really cannot, and when the compulsion becomes too great, we put it on the credit card “just this once.”

A month later, another deal you cannot miss comes, and so on until you are stuck with a large debt. No matter how much you earn, you can still fall into credit card debt. The only requirement is you spend more than you make.

Cost of Living Increases at a Faster Rate than Income

The growth of income has failed to catch up with the cost of living, leaving most Americans on a tighter budget. If you are living paycheck to paycheck, even the slightest increase in the cost of living will affect you.

This is especially true for growing families. If you’re still earning the same amount as when you were single and you now have a wife and two children, it would obviously be difficult to pay all the necessities and bills while giving your family a semblance of normal life. Luxuries are out of the question. The household income would be devoted to food, clothing, paying off mortgages and a car.

Sometimes, even cost cutting and a sideline are not enough to make ends meet. Depending on credit cards makes sense, in this case.

The problems are compounded when unexpected expenses arrive. When a family member gets sick and there’s no health insurance, or only a part of it is covered, the head of the family will be forced to borrow money in the form of a loan or take out a cash advance from his or her credit card. When the car breaks down and you don’t have money for major repairs or for buying a new one, the most logical solution would be to borrow money and pay it off either immediately after you get your next paycheck or on an instalment basis. Either way, this will upset the family budget, and may cause you to scrimp on the food budget or miss a couple of payments on your car or home.

Loss of a Job

Unless you own Apple or Windows, the biggest source of your income is probably your job. Especially if you are the sole provider of your family, losing it can cripple you financially.

Having no other earner to contribute in the household budget, paying bills even for your most basic needs like food and shelter can be hard. Some companies offer assistance such as severance pay, but that cannot permanently sustain the whole family.

If you are serving a saturated market, new jobs will be harder to come by. Therefore, to deal with this great a financial impact in your life, credit cards may be your only way out.

Sickness or Injury

Suffering from a fatal disease or a tragic accident doe not only shatter your bones or one of your organs, but their financial health as well.

Even with insurance, medical bills, not to mention the medicine bills, can easily pile up especially when you need to stay in the hospital until you recuperate.

To pay these, you may be left with no choice but to put it all in your credit cards. Given their high interest rates, the total amount you owe will continue to increase even when you are already well.

Depending on how severe your condition is, it is possible that you will not be able to go to work for an inordinate time.

Divorce

Divorce plays a large role in accumulated debts because it takes both parties from a relatively stable living condition to a totally unpredictable one. To begin with, lawyers are paid by the hour. The longer they agree on a settlement, the higher the fees get.

Aside from that, child support payments as well as new household costs may be too big for one to handle with the paycheck alone. In this situation, there is no choice but to turn to credit cards.

Natural Calamities

While there is home insurance against theft and fires, there’s no complete insurance coverage for forces of nature, or what they call “Acts of God”. While it doesn’t happen every day, when they do, these natural calamities can damage homes and property can leave people’s lives in shambles. Hurricanes, earthquakes, and other disasters cannot be predicted no matter how advanced science becomes. The recent spate of hurricanes and tornadoes affecting the United States and nearby areas have devastated homes and affected businesses. When these things happen, people who don’t have a lot of savings are forced to borrow money from the government or people they know in order to get back on their feet. Houses need to be repaired, new appliances and furniture need to be bought, while others choose to relocate to a whole new area and build their lives from scratch.

While these situations are considered out of the ordinary, they do happen and leave a deep impact in the lives of people. Natural calamities are things we don’t have any control of, but the more common reasons why people go into debt, are within their control.

Are You in too Deep?

The longer you keep a credit card debt, or a payday loan for that matter, the larger the chunk it takes out of your paycheck. Once it affects your spending on basic needs, you might want to start considering your options. If you don’t, you could find yourself having less and less money to spend on bills and necessities. You could also be saddled with interest and this could delay the repayment of your loan even further.

Some of the other signs to look out for when identifying your financial health include the following:

  1. You have a low credit score.
  2. Your credit cards are near their limits.
  3. You are only paying the minimum amount required per month.
  4. You cannot save for an emergency fund.
  5. The interest rates are considerably higher compared to when you first acquired a credit card

There are consequences for failing to meet your responsibilities to the credit card company. By considering credit card consolidation, you can transfer this debt to another loan with lower interest rate and longer payment plans.

Considering Credit Card Consolidation

Credit card bill consolidation plans can be secured or unsecured, and what you will need depends on how much you owe as well as your credit rating.

For many, this is the smart thing to do as it takes the hassle out of credit card payments while also preventing you from owing even more through accumulated interests.

There are several advantages to consolidating your credit card debts. Using a debt repayment calculator will help you decide if this is right. For one, it means having to pay only one interest rate and one bank. You don’t have to worry about making multiple payments and meeting each and every due date on time. The bank or credit consolidation company will merge all of the amounts you owe from various credit card companies and pay them off. You will end up owing only them. Once you choose to have your debt consolidated, you must be very honest about how much you can afford to pay every month or every payday. The debt consolidation loan company will help you pay off these debts so you can start fresh.

Personal Loans

Good credit is a measure of how trustworthy you are when it comes to paying your debts. This can almost guarantee you a personal loan. However, because there is no required collateral for you to obtain it, the amount that will be granted to you is relatively smaller.

This is a great option if you have been a little short on cash for only a few months, this may be for you. Still, you have to make sure you will have the financial resources for this loan.

Compared to secured debts like mortgage, the interest rate here is relatively higher. Moreover, the life of the loan is much shorter. Thus, if you need a large amount of money, this is not for you.

If you wait too long to address your credit card debt, you may be left with limited options when you finally wake up to reality. The worst case, you will have no choice but to file for bankruptcy.

One of the ways to solution this is by contacting your creditor to renegotiate your payment terms. However, as true as it is most of the time, avoid debt unless completely necessary. Manage your budget, and you may find you may not actually need a credit card at all.

A Refinance of Your Current Mortgage with Cash Out

Refinancing your current mortgage offers a lot of convenience for people struggling to pay their credit card debts. For one, the interest rate is lower so you can actually save money from refinance.

Along with the life of the term is longer for mortgages, you may end up paying virtually the same amount, depending on how big your cash out is. This is one of its best selling point as it offers something (credit card debts being wiped out) for almost nothing.

While a refinance addresses cash flow, one must not forget that closing costs will be incurred with this option. Amounting to a few thousand dollars, it can be paid upfront or be added to the balance of the loan.

Aside from that, it is also very risky, especially for people with unstable income. Credit card debts are unsecured, meaning creditors will not seize your assets for not paying. However, with refinancing your mortgage, your collateral is on the line.

Failing to practice restriction in unnecessary spending and to complete the payments means losing your home.

Home Equity Line of Credit (HELOC)

Having very valuable assets in your estate may prove useful when faced with high amounts of debt. Unlike your traditional mortgage, home equity line of credit does not give you an amount close to value of your house. It is much smaller.

What will be put on your credit depends on your mortgage. Most of the time, the value of your home is higher due to inflation. The difference is what the creditors award you.

Finance institutions are usually very relaxed on where you can use it. However, if you are already in debt, you should use it to settle the amount you owe to credit card companies.

Balance Transfer Credit Card

Balance transfer credit cards are a great option if you want to make your credit card debt more manageable. Most credit card companies that offer zero percent interest rate when transferring your credit card balances into this type of account. In some cases, you can even get zero percent interest on purchases.

Either way, the ability to transfer your balance to this credit card account means that you will be able to focus on paying just one card – instead of multiple credit cards. But you need to be cautious when using this approach. The advantage is that you can repay your debt within that promotional period (balance transfer credit cards enable you to transfer your debt for a certain amount of time and get zero interest). That way, you can save money from not having to pay an interest and use it towards paying off the principal debt.

Retirement Account

Do you have a retirement savings account? This account might be employer-sponsored such as your 401k or an IRA. If so, you can leverage this type of account to pay off credit card debt. However, finance experts caution against using this method to pay off your debts as it can seriously derail your retirement fund. But if you have no other means to access funds to pay your debts, then this is a worthy consideration.

One of the biggest benefits to using this method is that there is no credit check required. You can take money out of your retirement account. But make sure you do so via a qualified plan so you won’t have to pay a penalty for early withdrawal.

Friends and Family

Do you have family or friends who might have extra cash to spare? You can kindly ask them to loan you money so you can pay off your debts. However, you need to be extra careful when using this method because mixing personal relationships with finances can be a sensitive subject.

The advantage with borrowing money from friends or family is that you won’t have to go through credit check. In some cases, your friends or family will charge you with very low interest rate.

FAQs

Credit card debt is one of the most prevalent types of debt in the US. It is also a serious problem in other parts of the world. Credit card consolidation has emerged as one of the methods to handle overwhelming amount of debt. If you are considering this option, you must learn more about credit card consolidation before you take that big step.

Credit Card Consolidation

This section covers the top questions that consumers might have about credit card consolidation. If you are new to this process, these questions are going to shed some light to help you decide if this is the best option for debt consolidation.

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What to know about credit card consolidation?

You must shop around for the best provider of credit card consolidation. Make sure that you are given a fair interest rate. By shopping around, you can find the most reasonable interest rates on your credit card debt.

Should I do credit card consolidation?

It will depend on your individual situation. If your credit card debt is unmanageable, you might want to consider consolidating the loan so you can focus on making a single payment each month.

Is credit card consolidation worth it?

If you are drowning in credit card debt and have no other option, it is a worthy consideration. The longer payment terms also mean that you can work on re-establishing your credit score. Check out Discover card debt consolidation options.

How do debt consolidation loans work?

Debt consolidation loans work paying off multiple debt accounts and then pooling them into a new loan. It will make managing your payments easier because you only have one loan to think about, instead of several loans.

Can I use my credit card after debt consolidation?

Yes. Debt consolidation will not close your account and closing it down isn’t a requirement either. Most consumers choose to close their credit card to avoid temptation of using them again.

What are the disadvantages of consolidation?

When you consolidate your loan, there is a possibility that you pay more for the higher interest rate on the newly consolidated loan. Your credit score can be a factor, too, in determining the interest rate. That’s why its a good idea to go with the best rated debt consolidation company.

Is consolidating debt a good idea?

If you have multiple credit card debts, you can choose to consolidate them into a single loan to make payments easier to manage. At the same time, it will reduce the likelihood of late payments. Compare debt consolidation lenders to see who has the best rates.

Is it bad to consolidate your debt?

There are advantages and disadvantages to consolidating your debt. It is important that you are aware of those to make the right decision for your financial situation. The potential drawbacks include a higher interest rate and a higher total loan amount (due to the longer payment period).

What’s the difference between credit card refinancing and debt consolidation?

Credit card refinancing is the process of paying off the original loan to establish a new payment schedule and terms. This is an option for those who would like to shorten their payment terms. Meanwhile, debt consolidation is the process of rolling into one your multiple debts so you can focus on repaying a single loan.

Can you use debt consolidation for car and credit card?

Yes you can. Credit card consolidation is a widely available debt relief option for those with massive credit card debt. However, you might want to think twice about consolidating your car loan debt. It is a secured type of loan and the lender has the power to repossess your vehicle if you are unable to make payments.

What’s the difference between credit card consolidation and debt consolidation?

The process of consolidating the loans for credit card and other types of debt are similar. However, it will vary depending on the interest rate that is included in your newly consolidated loan.

When should you consolidate credit card debt?

You should consider consolidating your credit card debt if the following scenario applies: 1) you spend most of your monthly income towards your debts, 2) you qualify for a low-interest debt consolidation loan, and 3) you want to prevent building up your debt again.

Credit Score

This section provides a detailed look at the potential impact of credit card consolidation on consumer credit score. If you have any questions or concerns about your credit score, you will find the answers below.

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Is consolidating credit cards bad for your credit?

Credit card consolidation will definitely have an impact on your credit score. It could cause a ding on your credit score while you are under the debt management program, as you will have to close some accounts. But you will be able to re-establish your credit score once you become debt-free. Remember there are even unsecured debt consolidation loans bad credit options.

How can I lower my interest rate on my credit card?

There are plenty of ways to lower your credit card’s interest rate. One of them is to negotiate with your credit card company about lowering your interest rate. Another option is to transfer your balance to another card with lower interest rate.

Can I get a debt consolidation loan with poor credit?

Even if you have a poor credit rating, you can still qualify for a debt consolidation loan. However, you will be charged with a high interest rate.

Do debt consolidation loans hurt your credit score?

It can hurt your score if you continue to use your credit card, or if you’re late on making payments on your debt consolidation loan. It is also not a good idea to take out a personal loan to pay off your credit card debt because it can lower your credit utilization ratio. For example, take a look at USAA debt consolidation programs.

How does a debt relief program affect your credit?

A debt relief program can affect your credit in various ways – both in short- and long-term. It will depend on the type of debt relief program that you have chosen to utilize. Is national debt relief legit?

How long does a debt management plan affect your credit rating?

There are short- and long-term impacts that you can expect with a debt management plan. It will vary on which specific debt management plan you use. With debt consolidation as the most popular option, it will depend on the length of repayment on your consolidated loan and its corresponding interest rate. Read about how to consolidate credit card debt without hurting your credit.

How does credit card consolidation affect your score?

A hard inquiry on your account when you apply for a credit card consolidation loan can cause a dip in your credit score. Another factor is the credit utilization – or the amount of debt you owe versus the amount of debt available. It is therefore important to consider the status of each credit card when applying for a credit card debt consolidation. Remember there are unsecured debt consolidation loans bad credit options too.

Do credit card consolidation loans hurt your credit?

Applying for a credit card consolidation loan can hurt your credit, due to the hard-pull credit inquiry. However, freeing up your credit limits and making on-time payments can help it to improve over time. Read more about using a personal loan for debt consolidation bad credit options included.

How to consolidate credit card debt with bad credit?

For people with bad credit, you may consider a debt management plan with a counseling agency. They can negotiate with creditors on your behalf to allow you to get a favorable interest rate. Another option is to apply for a secure debt consolidation loan, which means you need to provide the lender collateral (such as your car or home). This will enable you to get a low interest rate; but the risk is that your car or home can be repossessed if you are unable to pay. In the meantime it may be possible to find debt consolidation lenders bad credit included.

Credit Card Consolidation Company

This section will help answer the top questions relating to choosing a credit card consolidation company. Each company has different services and policies – it is important to weigh these factors in when choosing. We provide you with the answers you need to find the right company.

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What is the best debt consolidation company?

There are several debt consolidation companies out there, including National Debt Relief and Freedom Debt Relief, and choosing the best will depend on your current financial situation. It is therefore important to shop around to find the best rates on your consolidated loan.

Where can you get a credit card consolidation loan?

There are several options if you are looking to apply for a credit card consolidation loan. The first option is your local bank, but you can also check out credit unions and other financial institutions. A Lendingtree debt consolidation loan may be a good option.

What is a good credit card consolidation company?

Finding a good credit card consolidation company will depend on your personal needs. The best way to narrow down your selection is to choose according to the lowest minimum credit score requirement, the stability of the institution, flexibility of loan amounts, and the support you can get from them.

What banks do credit card consolidation?

There are several banks that offer credit card consolidation. In the US, among them are Wells Fargo debt consolidation, Bank of Texas, and US Bank. You can inquire with your local banks if they offer this type of debt management plan.

Credit Card Consolidation Process

This section will help you understand the process of consolidating your credit card debts. To help you prepare for the process of consolidating your debt, we provide the answers to your most pressing questions.

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Can you negotiate with credit card companies?

Yes. When dealing with a large amount of credit card debt, you can negotiate with the credit card company so you can lower your interest rate and adjust the payment terms (if you want to shorten or lengthen the payment period). You can even negotiate a settlement for the amount you owe.

How can I settle my credit card debt?

You can settle your credit card debt by offering to pay a certain percentage of the total amount you owe. Once you have made the payment, you can re-negotiate with your lender about it to make payments easier to manage.

How can I get rid of credit card debt legally?

There are several steps that you can take to legally eliminate credit card debt. You can pay off the high-interest balance first, or the one with the smallest balance. You can also try to call your credit card company about re-negotiating a better rate.

How can I reduce my debt quickly?

There is no shortcut to eliminating debt. Just as it took months and years for the debt to build up, it will also take the same amount of time to eliminate them. Make sure to explore the different debt relief options so you can pick the one that will help you become debt-free faster.

How does consolidated credit works?

Consolidated credit means that you have combined your multiple debt accounts into a single loan. All of your other debts are paid off but you will have a new, single loan to make payments for. Read more: What does debt consolidation mean?

Can you settle credit card debt?

Yes. You can negotiate for a lump-sum settlement or negotiate with the credit card company to reduce the principal amount on your debt account.

Can you settle a lower payoff amount on a credit card?

Yes. Most credit card companies would be willing to negotiate a lower payoff amount, especially if you are willing to pay the company with spot cash.

Can you negotiate lower credit card payments?

Yes. When you negotiate with a credit card company, you can also ask them to reduce your interest rates. With a lower interest rate, it will make the total loan amount you need to repay more affordable.

How much can credit card consolidation save you each month?

The amount of money you save on credit card consolidation per month will vary largely, depending on your lender or the total amount of debt you owe. However, credit card consolidation is less about saving money, but more about helping reduce the amount of debt you owe.

Will credit card consolidation affect my home loan?

No, it will not. However, your home loan could be at risk if you choose to secure a home equity loan or line of credit. Make sure to meet your monthly payments to ensure that you can keep your home.

What’s the next step after credit card consolidation?

Once you have been approved for your credit card consolidation, you must make on-time payments on your newly consolidated loan. It is also recommended that you stop using your credit card until your finances are back in order.

Do you have to close a credit card during consolidation?

Closing your credit card account is not recommended when doing consolidation. It can have a negative impact on your credit score, especially when you had that account for a long time. If you think you won’t be able to resist the temptation to use your credit card again, then closing your account is a good step.

Does a 401k account count when doing credit card consolidation?

Experts think that using your 401k or retirement savings for consolidating your credit card debt should be viewed as a last resort. It can significantly derail your retirement savings. At the same time, this type of loan does not address the issues involving how you accumulated your debt.

How to consolidate credit card debt on your own?

If you’re wondering how to pay off credit card debt then there are several alternatives to consolidating your credit card debt on your own to make paying it off easier. One of the most common methods is through credit card balance transfer, wherein you can get zero interest rate when you transfer your existing balance from other cards into a new card account. Other options include taking a home equity line of credit or borrowing from your retirement fund. Each option has its own sets of pro’s and con’s and you need to be informed of each before making your choice.

Should I consolidate credit card debt with a personal loan?

Taking out personal loan to pay off your credit card debt is a reasonable option. However, you need to look at not just the interest rate, but also the length of the loan. Lower interest rates that require a longer repayment period would cost you more in the long run.

Can you consolidate credit card debt with student loans?

Yes, you may consolidate your credit card debt with student loans. However, you cannot expect to pay lower interest on the newly consolidated loan. On the other hand, you may not take out a student loan to pay off your credit card debt as this loan can only be used towards college debts.

Can you consolidate debt from one credit card to another?

Yes. This is called a credit card balance transfer and there are many credit card companies that offer this to consumers. When you transfer your existing credit card balances into one new card, you will be able to focus on paying just a single credit card account, making payments easier to manage.

How many times can you consolidate credit card debt?

Ideally, you should consolidate your credit card debt only once. When you consolidate, all of your existing debts will be rolled into one loan and you have just one to focus repayment on.

Can you consolidate your spouse's credit card debt?

It varies on the laws within your state. Most states will only make you responsible for debts that are under your name. But there are also states wherein you will be responsible for the debts of your spouse if you co-sign the credit card.

Should I consolidate my credit card debt into my mortgage?

You can, but you need to be extra cautious when doing this. When you roll unsecured debt to a secured loan (such as your mortgage), you make it difficult to manage the secured loan. At the same time, you could potentially lose your home.

Should you consolidate credit card before buying a home?

It depends. You can still qualify for a loan to purchase a home (depending on the lender), but the fact that you are consolidating your credit card debts can cause a ding on your credit score. Your lower credit score would mean that you will pay higher interest rate when you apply for a mortgage.

Can you consolidate credit card debt into a refinance?

If your goal is to 1) pay off credit card debts and 2) lower the rate on your primary mortgage, you may consider a refinance. But rolling credit card debt into mortgage can lower the interest rate, it can put your house at risk of being repossessed.

Dan Steadman

Dan Steadman

Financial Advisor, DCL

Dan is one of the top financial experts when it comes to debt consolidation. With more than 20 years of experience helping people tackle debt, he has a unique insight when it comes to solving debt-related problems. 

Dan got his start when he went to work for a bank after getting his Business Degree. He worked his way up and became a loan officer. This position gave him unique insights into the ways that financial products work and how people can utilize different financial products to improve their lives. He’s seen hundreds of success stories and just as many failures – so he knows what steps are most likely to help his readers.

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