Posted by Advantage Tax Services, Inc.

Consolidating Credit Card Debt: What You Need To Know

Consolidating Credit Card Debt: What You Need To Know

Big savings will be the result if you will consolidate your credit card debt. You can get a lower rate and pay off your debts with one monthly payment instead of paying high-interest rates and making multiple payments each month. 

One of the most expensive types of debt is credit card debt. It would be so hard to keep your head above water especially if you only make the minimum payment, you're barely making a dent in your loan balance. 

Consolidation is just a strategy that might help you simplify and save money since this is not the only way to pay off credit cards. You can use different strategies like the "debt avalanche" or the "debt snowball" instead if you prefer.

Make sure everything makes sense before you start the process of consolidation. You might end up hurting your credit or spending more money than you would if you just paid off your cards.  Consolidation makes the most sense when:

  • You can't pay off your credit cards right away (a balance transfer might make more sense if you can pay everything after six months or a year)
  • You can qualify for another loan
  • You will get a lower interest rate on the new loan

Figuring out how much you will really save if you consolidate your credit cards is a good idea. If you make the minimum payment, take a look at how quickly you can pay down those cards (and what happens if you will pay a little extra). See how to calculate credit card payments for example. Then, for you to see the difference, run some numbers on your new consolidation loan: will your savings be eaten by fees, how much will you save on interest? It's time to get started if the numbers look good. 

Your credit is important for most consolidation loans. Lenders will most likely evaluate whether or not you are likely to repay a loan. They do this by calculating how much of your monthly income is available to pay off your debts and by looking at your credit scores. 

You will have a hard time getting approved if your credit and income are not high. If you are approved, you might pay higher interest rates which will make your situation worse. But, to overcome those challenges, there are two ways:

In applying for a loan, a cosigner can apply it with you. Your cosigner's credit and income including yours will be considered by the lenders. If you stop making payments, the cosigner will be 100 percent responsible for repaying the loan on your behalf. Some people can't take that risk since being a cosigner is quite risky. But, you might get better terms on a loan if you are fortunate enough to have a cosigner available.

Another option is pledging collateral.  Lenders can get their money back by taking what you own (the collateral) instead of just relying on your credit and income. For example, if you start missing payments, then your lender can repossess the car that you pledged as collateral-- they will sell your car and collect what is owed. This is risky but we will discuss the risks and some better alternatives next. 

Picking the Right Loan

For paying off credit cards, there's no single type of consolidation loan. The act of bundling multiple loans into one single loan is what consolidation simply is. So, what is the best type of loan?

If possible, always go with a fixed interest rate and that are unsecured personal loans. These type of loans are what you get based on your income and credit. In case you are unable to repay the loan, your lender cannot get anything from you since you don't need to pledge a collateral. Your lenders can't generally force you out of your home through foreclosure or take your vehicle but they can report that you have missed payments which will hurt your credit.  

It is best to keep your credit card debt as personal unsecured debt. You would need a good reason since you are increasing your risk if you are planning to switch to a loan that is secured by collateral. Start collating information for unsecured loans from a variety of lenders. Go with the best deal after comparing everything. 

Online loans are often from non-bank lenders and include peer to peer lenders. The application process is easy, the approval decisions come quickly and the best thing is it is usually less expensive than loans from banks. In your list, include a few of these lenders. 

You never know until ask maybe credit unions and banks might also meet your needs. Particularly, a credit union might give you a chance to talk face to face with a lender and discuss your situation. Even if you have no perfect credit, some smaller institutions are more likely to approve loans on attractive terms. 

Another option is the balance transfer offers. You will probably get several of these offers per year if you have good credit. The idea is that for six to twelve months, you open a new credit card account with a low-interest rate (0% APR, for example). You will pay normal credit card rates after the promotional period. Balance transfers are a good deal if you are able to pay off your debt before the promotion ends. Surfing from offer to offer is risky so it is best if you can pay off your debt in just one transfer. 

For homeowners, second mortgages might work. You can borrow against your home's substantial equity if you have with a second mortgage. However, it is risky since you are putting your house on the line because it must be pledged as collateral. You could be forced out of your home through foreclosure if you don't make your payments on time.

Start filling out applications once you have picked the best type of loan

Complete all of your applications within a relatively short time frame if you are going to apply for more than one loan (perhaps you want to shop among competing lenders or you want to try different types of loans-- which is a good idea). The lender checks your credit every time you will apply for a loan, and with that, they will create an inquiry of your credit reports. Your credit score will be bought down is there are too many inquiries because it will look like you are struggling financially. However, shopping around before borrowing will not hurt your credit score if all of those inquiries will happen within 30 days or so. 

Don't believe in lenders promising that they will approve everybody regardless of the credit because there's no way you are going to get a loan without a credit check. 

Advantage Tax Services, Inc.
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