A number of credit cards used per month can make the range of interest rates and due dates feel overwhelming.
More and more people are borrowing through credit cards as the number of inquired have risen by 60% over the past 2.5 years.
Credit card debt consolidation lets you put together those balances into one monthly payment. Besides making repayment more streamlined, doing this could reduce the overall interest you pay, shedding more light on how much you owe and thus reducing the confusion caused by multiple statements.
Below, we explain how credit card debt consolidation works, why it may be of help to you and some important things to keep in mind before you take the plunge.
What Is Credit Card Debt Consolidation?
Credit card debt consolidation is the process of combining two or more outstanding credit card balances into a single account or loan. Instead of making various payments to different issuers, you end up with just one monthly payment.
This can be achieved through several avenues, such as transferring balances to one low-interest card, taking out a debt consolidation loan, or utilising another financial product to pay off your existing credit card debts. The end goal is to simplify your repayment schedule and ideally reduce the amount you spend on interest.
Why Consolidation Helps
Simplifies Your Finances
Sometimes, it may be difficult to keep track of all those credit cards when each has a due date on a different day, increasing the chance of paying late or missing a payment altogether.
Consolidating all the debts into one account means fewer dates to remember and, hence, less chance of accruing any late penalties or higher interest rates by accident.
Potentially Lowers Interest Costs
Credit cards often carry high interest rates, sometimes well above 30%. By consolidating those balances into a single account – especially one with a lower interest rate – you can cut down the total interest you pay over time.
Reduces Monthly Stress
Constantly checking different statements can be mentally taxing. A single monthly payment makes it easier to maintain a budget and stay organised, which can free up mental space for other financial goals.
Improves Your Payoff Timeline
Because a large part of the payment made toward high-interest cards goes to interest rather than reducing the principal, you may find that you remain in debt for many extra years. However, consolidating all your debts under a lower rate lets you pay more towards the principal and less towards interest; you could pay off the debt in a possibly lower time frame.
Different Ways to Consolidate
Balance Transfer to a Low-Interest Card
Some credit card issuers offer the option of promotional low interest rates or 0% balance transfers for a certain time. This could be a good option if you qualify for it and can repay the debt within that promotional period. But beware of any balance transfer fees, as these reduce your potential savings.
Debt Consolidation Loan
A debt consolidation loan allows you to borrow a lump sum to pay off your credit card balances all at once. You then repay this single loan in monthly instalments, often at a lower interest rate than your credit cards. This route is particularly helpful if you have a decent credit score, as it can help you secure more favourable terms.
Personal Lines of Credit
If you have access to a personal line of credit at a reasonable rate, you can use it to clear your credit card balances. The advantage is flexibility – you can borrow and repay as needed up to a set limit. However, personal lines of credit may come with variable interest rates, which could rise over time.
Key Considerations Before You Consolidate
Check the Total Cost
It is always reassuring to have lower monthly payments; however, sometimes extending the repayment period means you end up paying more in interest overall. Use a calculator or budgeting app to estimate what it may cost you over the life of the loan.
Mind the Fees
Balance transfers, new loan origination fees, or closing costs might apply to certain consolidation methods. Read the terms carefully to ensure that the fees do not outweigh your potential savings.
Check Your Credit Score
If your score is already low, it might be challenging to secure favourable rates. In that case, consider alternatives such as consulting a financial adviser or developing a realistic repayment plan for your existing credit card debts.
Staying on Track After Consolidation
After consolidating your credit card debt, follow a strict repayment plan. Automate payments whenever possible or, at least, monitor your monthly statements closely to ensure you remain on track. Also, building an emergency fund will keep you from having to resort back to credit cards when an unexpected expense arises, thus protecting your financial health.
Final Thoughts
Consolidation of credit cards may provide much-needed respite due to lower interest payments, fewer monthly repayments and a clearer view of your total debt. Whether it be a balance transfer, a debt consolidation loan, or another method, whichever strategy you choose should help you build new healthy payment habits, thereby keeping your credit card balances under control. It is feasible to secure a steadily happy financial future with the right approach.