Are you drowning in credit card debt? This guide will explain how you can consolidate credit card debt into a single more manageable loan. We will also answer the following questions:
- Why can credit card debt become a serious issue?
- What is credit card consolidation?
- Is debt consolidation a viable option for your financial situation
- What to do if your credit card debt is out of control
Why and How Can Credit Card Debt Be Damaging?
According to figures from the U.S. Census Bureau and the U.S. Federal Reserve, the total revolving debt in this country is at $929 billion and 38 percent of all U.S. households carry some kind of credit card debt. (Source)
The average American household carries a balance of $15,000 over 5 different credit cards. Carrying a balance on your credit cards means you are being charged interest. Twelve percent of card owners (source) can only afford to make the minimum payment on their credit cards each month, which can lead to more and more debt as the months go by.
You may face penalties if you cannot make your minimum credit card payment each month or if you charge over your credit limit. Many creditors will also increase your annual percentage rate if you miss a payment. This can cause serious financial difficulties if you are carrying a large balance. All these factors make carrying credit card debt risky business.
How To Know When It’s Time to Get Your Credit Card Debt Under Control
Since so many credit card users carry a balance each month, it is easy to assume that it’s okay to do so. Here are some warning signs that let you know when you are actually in trouble with your credit cards:
- Your credit limits are maxed out. Experts agree that charges amounting to more than 70 percent of your available credit limit may be a warning sign that you need credit card help.
- You find yourself using your credit card to pay for items you used to pay for with cash. This can be a sign that you are living beyond your means and relying too heavily on credit cards.
- You’re only able to pay the minimum payment each month.
- You shift credit card balances from one card to another to avoid over-the-limit spending.
- Payments are late or missed.
- You feel embarrassed about your credit card balances.
Can you relate to any of those statements? If so, it’s time to come up with a different credit card strategy.
What Is Credit Card Debt Consolidation?
Debt consolidation allows qualified consumers to take out a new loan that pays off most or all their outstanding debt. By combining all the individual debts and paying them off, the new debt consolidation loan might become the only unsecured debt owed.
Debt consolidation makes sense if:
- You are able to pay off your credit cards but need a better and faster way to do it
- You can get a lower interest rate by consolidating your credit card debt
- The terms of your debt consolidation show that you can pay off your debt in a reasonable amount of time
Not all debt consolidation strategies provide all these benefits, so it is important to carefully consider whether debt consolidation is right for your particular circumstances.
What Types of Debt Consolidation Work for Reducing Credit Card Debt?
There are two common methods for consolidating credit card debt. You can apply for a new credit card or you can apply for a personal loan or line of credit for debt consolidation purposes.
Using a New Card to Consolidate Debt: Getting a new card to get out of credit card debt may sound strange, but it is possible. For this option to be effective, you have to make certain that:
- The interest rate on the new card is lower than the interest rates you are currently paying
- The credit limit on the new card is high enough to make balance transfers from all your other credit cards
- The balance transfer fee amounts to less than the interest fees you would pay if you left your balances on your existing cards
You must also consider whether getting a new card will tempt you to increase your credit card spending. For some cardholders, the lure of a new card is too strong to handle. If you fall into this category, obtaining a new card is the last thing you want to do.
If you think you can handle having a new card, check out these recommendations for cards that are great choices for debt consolidation.
Related article: 5 Best Credit Cards to Consolidate Debt
Using a Personal Loan or Line of Credit to Consolidate Credit Card Debt
If using another credit card to consolidate your debt is not possible or does not appeal to you, you can apply for a personal loan or line of credit. For this option to be effective, you have to make certain that:
- The interest rate for the loan is less than the interest rate you are currently paying on your credit cards.
- Your payment will be less than what you currently pay, or, your repayment terms will be shorter.
- Your loan payment will not create a financial hardship or have a large negative impact on your credit score.
If you think this is the right option for you, try out SuperMoney’s personal loan search engine to see the best terms and rates available. SuperMoney’s loan search engine allows you to filter loans by credit score, state, loan amount, origination fees, and APR.
What If You Cannot Qualify for Debt Consolidation Loans?
If you cannot qualify for a new card or a personal loan to consolidate your debt, all is not lost. You still have the options of debt settlement, bankruptcy, and consumer credit counseling.
Professional credit counselors may be able to design a debt management plan to help you get out of crippling debt faster.
Bankruptcy is a serious move. When considering bankruptcy, it is important to note that bankruptcy may erase some or all of your debt but can have long-term effects on your ability to get loans or new forms of credit. A bankruptcy attorney can discuss these matters with you in more depth. However, remember you will need to pay upfront fees to hire the services of a lawyer. Debt settlement companies, on the other hand, don’t charge you a dime until they have settled an account.
Debt Settlements as an Alternative to Debt Consolidation Loans
Debt settlements can be a good option even if you qualify for a debt consolidation loan. How come? If you are already financially overextended it’s unlikely you will get approved for a debt consolidation loan that provides a meaningful reduction in interest expense.
Debt settlement companies negotiate with your creditors to resolve your debt. The settlement is a lump sum, which is less than the full amount owed. Just be sure to do your research: some companies are more reputable than others. Our reviews will help you find reliable debt settlement companies.
Why would a credit card company agree to take less than what is owed?
Think of it this way. Your credit card company would prefer to receive at least a portion of the amount owed rather than nothing at all. Since the collections process can be quite costly, your credit card lender may decide that it is in the best interest of everyone to accept a settlement.
The best time to settle credit card debt is before it has gone to collections. Making a settlement early on saves the credit card company costs related to the collections process and may increase the chances that the lender will accept your settlement offer. If times are tough and you know you will not be able to repay your debt, calling the lender as soon as possible can make it easier to work out a deal.
A reputable debt relief company will work with you to find solutions that help you get out of credit card debt as fast as possible. Not sure what type of debt relief you need? Get a free consultation today. There is no obligation to carry through with the recommendation but at least you’ll know what your options are.