Credit cards provide us with many amenities when using them for various purchases and payments. In addition to convenience, most credit card issuers offer various attractive reward programs for their customers for using credit cards. However, the presence of several credit cards can be difficult to maintain, since each credit card has its own conditions and while in use each one has its own debts and requires different payments at different time. Many Americans are experiencing difficulties because of this and are looking among the ways to consolidate credit card debt that is most suitable for them.
Consolidating a credit card debt can allow you to get easier conditions for keeping your credit cards, and also, with the right approach, gain an advantage in the form of an increased credit score. To understand how to do this better and get all the possible benefits from it, you should learn more about Best ways to consolidate credit card debt in order to choose the most appropriate for your financial situation in which you are.
In addition, the results of the consolidation will be a change in your credit rating, but in which direction it will change depend on your actions. Your future financial opportunities may depend on which of the ways to consolidate credit card debt you choose.
As with any other way to solve financial problems, credit card debt consolidation also has its pros and cons. We will consider them below so that you can make the right decision, so read on to finally find a way out of the difficulties with your credit cards by selecting and applying one of the ways to consolidate credit card debt.
What are credit cards?
Most adult Americans have at least one credit card in their use, but few know or understand what it essentially is, in addition to being a small piece of plastic that can be used to pay for purchases or withdraw cash from an ATM.
In fact, credit cards are one of the financial and credit products that provide the opportunity for customers of banks and other financial issuing companies to use borrowed funds as part of a credit line allocated to them. At the same time, credit cards make it possible for credit companies that have issued them to earn at the interest rate.
However, unlike other financial products, credit cards have their own characteristics, which sometimes can lead some borrowers to a large debt, which they then can not handle. These features include the following differences:
- Reusable loan. The credit limit can be used many times, subject to timely repayment of a previously used credit on a monthly basis. Installment loans, for example, can only be used once, so each time after repaying such a loan, you will need to apply for a new one, unlike a credit line on a credit card. In such circumstances, many forget that for the funds that they use, you also need to pay an additional interest rate.
- Floating interest rate. Credit card issuers often, in order to attract new customers, offer an initially grace period with very low interest rates. In many cases, it can even be 0% per annum during the first few months, after which the lender’s interest can reach 25% or more per annum. You should always remember this and pay off arrears before the end of the grace period.
- Payments you do not see. Paying your purchases and bills with credit cards, you can not always see what additional interest or commissions are additionally charged. As a result, by the end of the month a significant amount of money is accumulating, that, taking into account the changing interest rate, can be an unpleasant surprise for you. As a result, at some point your debt may become an unbearable burden for your budget. In such a situation, even Best ways to consolidate credit card debt can become difficult to implement.
- The minimum payment. In order not to have claims from the lender and to be able to continue using the credit card and its credit limit, the borrower will need to pay at least the minimum monthly payment that is set by the lender. It would seem good that you can pay less than the amount of your debt, but in this way you may endlessly extend your debt. Minimum payments usually cover only the interest rate set by the card issuer for the use of credit funds, but the debt itself remains in place. Thus, every time you make only a minimum payment, you simply overpay money for interest.
What is your credit and what affects it?
The condition of your credit is assessed by credit bureaus, which collect information about credit events from each borrower. Either your timely payments on the loan or the delay is reflected in your credit report, which is then checked by each lender to whom you apply, when opening a new credit card or increasing the credit limit.
Your credit rating is determined by credit points. Each positive credit event adds a few points to your credit score, and negative on the contrary reduces their number. In addition to direct loan payments, several factors influence your credit, each of which has its own importance for changing the credit score.
- Payment History
This is the factor that matters most to creditors, so it has the largest weight in determining your credit rating. The amount of your credit points will significantly depend on whether you allowed missed or late payments in your credit history.
- The number of loans
If you have several existing loans and several opened credit cards, this will reduce your credit score, since you are in a zone of greater risk for lenders.
- Types of debt
It is attractive for lenders when a borrower is able to manage different types of credit. If you have had successful experience with mortgages, car loans, credit cards, personal loans and other types of loans, then you will have more chances to get a loan approval on more attractive terms with low interest rates.
- Credit card balance
This indicator reflects the degree of use by you of the credit limit allocated by the creditor. If the balance on your credit card does not exceed about a third of the credit line, then it is considered low and does not adversely affect your credit score. If the loan you use exceeds 30%, then your credit rating will decrease.
- The number of loan applications for a certain period of time
A large number of loan applications in the either last month or several months, can tell lenders that you have a tense financial situation and you are desperate for money. This carries great risks for them and your credit status will also worsen because of this.
Get your credit report
Find out specifically about the state of your credit and at what level the credit score can be from the credit report. Under US law, every citizen is entitled to one free credit report each year at each credit bureau. Such a request will not be considered a hard credit check therefore it will not affect your credit score. You will only need to make a request for a credit report on the website of one of the credit bureaus and upload it.
Credit score and credit cards
Credit cards affect your credit rating, as do other types of credit. The number of open credit cards and the total amount of debt on them is added to the rest of your loans and the total amount of your debt. How you make payments and what share of the credit limit you use is also taken into account when drawing up your credit report. Consider in more detail how your handling of credit cards affects the status of your credit.
- Use of affordable credit. If you have balances close to your credit limit, this will lower your credit rating. This shows that you are almost using all available credit.
- The total amount owed. This factor is one of the most important. Big amount of your common debt reduce your credit score.
- The number of open credit cards. If you have a high credit card debt and balances are almost at the maximum level of expenses, this will affect your credit badly. Too many credit card debts will also not play into your hands.
- Timeliness and fullness of repayment of credit card debt. As with other types of credit, the payment history is of the greatest importance in determining the credit rating, therefore, timely payment by credit card and full repayment of the balance monthly will have a positive impact on your credit rating.
Handling Credit Card Debt
When you have several cards with rather large debts formed on them, it may make sense for you to consolidate your debt. If approved by the creditor, loan consolidation will help you get attractive initial conditions for the first few months of using a credit card.
Such mitigation will facilitate the payment of the resulting debt, as well as improve the management of your loans. Instead of several debts with high interest rates, you will have one with preferential terms for some time, for which it is worth trying to manage to pay off all this debt, or at least most of it. With credit cards, there are several different ways to consolidate credit card debt.
Best ways to consolidate credit card debt include balance transfers. To do this, you open a new credit card and transfer the balance from the rest of your credit cards to it if you receive approval from the lender. In this case, the issuer of the new credit card will pay off the remaining balances on your other cards and you will be left with one creditor. In addition to the now consolidated debt, you will need to pay some fee to the new lender, usually this is about 3% of the amount of the transferred balance.
Consolidation Using Personal Credit
Another popular way to consolidate credit card debt is a personal loan. A personal loan is a type of installment loan, such as a mortgage. After the creditor approves your application for a personal loan, you will receive a one-time approved amount, which then, taking into account the interest of the creditor and fees, will be repaid monthly in equal installments every month during its term. In this case, you pay off the balance from your credit cards with the money that you will receive as a personal loan.
Do you need to use one of the Best ways to consolidate credit card debt?
To determine whether you should take the opportunity to consolidate your credit card debts, you will need to consider and weigh all the factors and conditions in which you are. Of course, this will cost you some effort, but it is necessary to do this in order not to make erroneous decisions and not aggravate your financial situation.
You need to understand that the state of your credit will directly affect the interest rate that a new creditor can offer you. A credit history and the level of your income and expenses will also affect it. If the interest rate on a loan for debt consolidation is high enough, then it will hardly make sense for you to bind yourself with such a loan. If you cannot pay it in time and in full, it will only harm your credit rating and will not help you in solving problems with your credit card debt.
When the monthly payment to pay off the consolidated debt will be on the verge of your budget, then to increase your chances of a successful outcome, you should consider cutting some of your expenses. Try to keep a small power reserve so as not to get out of track in case of any unforeseen situations requiring extra expenses.
Of course, if you use a personal loan as one of the ways to consolidate credit card debt, you can probably choose a longer term, thereby reducing the monthly mandatory payment. However, it is worth remembering that the longer the installment loan, the more you will overpay for it at the expense of the interest rate. Then debt consolidation will lose its meaning for you, because in this case you will not be able to save money on this.
Choose a reasonable middle ground so that the loan payment can be done for you every month and at the same time its term is not too long, dooming you to pay a lot more in the end. Then you can make all payments on time and get a significant improvement of your credit during this time.
If you have some doubts about the relevance of debt consolidation for you, then you can find out more in our financial blog or get advice from our personal finance experts. Use the application form on this page to find out which personal loan options for consolidating credit card debt are available to you.