As of 2020, 80% of Americans have at least one credit card, and there are 365 million open credit card accounts, according to the data released in May 2021.
Credit cards are convenient, but if used recklessly, you may end up with a humongous debt that can be very difficult to pay back.
Currently, an average American owes $5,221 in credit card debt. This is quite a significant amount for most people to pay back. Hence, many people wish to consolidate credit card debt to make it easier for themselves to make repayments.
Continue reading to learn about the best way to consolidate credit card debt.
What is Debt Consolidation?
Before we begin, it is essential to understand what debt consolidation is.
Debt consolidation combines multiple open loan accounts to make new repayments with a lower interest rate and a new timeline.
Similarly, credit card debt consolidation combines all credit card accounts with a red balance to ensure the account holder can pay all their balance easily in due time with less interest rate.
Most people have multiple accounts for repayments, and paying back all these varying amounts and keeping track of your debt can be a real challenge. So, people opt to consolidate credit card debt and make one monthly payment to repay all their loans collectively. Furthermore, there will be no need to remember different due dates because all your credit card debt will be paid through this new account after approval.
Now, let’s look at some of the ways you can consolidate credit card debt:
1. Credit Card Balance Transfer
This process is also known as credit card refinancing. Basically, you can transfer your current credit card balance to a new one. This new credit card will have an introductory APR of 0%. Hence, you will have a window to repay a good chunk of your principal amount at no interest.
This step can give you a major advantage in paying off your loan quickly. If not, it at least gives you a chance not to pay interest for up to 21 months, depending on the balance transfer card.
However, there may be a specific limit to transferring your balance. In this case, you will be stuck with repaying two loans. Furthermore, you may be charged an upfront fee of 3% to 5% on each transfer.
Many people consider this the best way to consolidate credit card debt because of the 0% APR, even if it is for a short period.
2. Personal Loan
You also have the option to take out a personal loan in order to consolidate credit card debt. Unlike balance transfer credit cards, personal loans have an interest rate determined by the loan terms and credit scores. So, the better your credit score, the lower your interest rate.
The lender will also offer you a structured repayment plan with monthly repayments, which will make paying back more manageable. Moreover, your interest will be fixed so that you will be repaying the same amount monthly.
In addition to this, some lenders might make payments directly on your behalf every month, so you won’t have to remember due dates. However, you must ensure there is enough money in the account you have listed. Taking out a loan for credit card debt consolidation may require paying an origination fee.
3. Debt Management Plan
Credit counseling agencies offer debt management plans for people who have massive debt and find it difficult to repay. This is the best way to consolidate credit card debt if you have a bad or low credit score.
The agency will contact your credit card service providers and ask to initiate a different and more structured repayment plan with a lesser interest rate and monthly payments. Once approved, you will have to make a single monthly payment to the counseling agency, and they will divide and make repayments to your creditors on your behalf. However, this does come with a few disadvantages, such as:
- Some credit card companies may reject the proposal
- You must be consistent with timely payments
- You must close all credit card accounts, and you will not be allowed to use another until you pay off your entire loan.
4. Peer-to-Peer Lending
There are plenty of peer-to-peer lending platforms that can help you consolidate credit card debt. These platforms offer marketplaces where lenders can connect with people looking for ways to consolidate debt.
The interest rate depends entirely on credit score. People with good FICO ratings are likely to have a lower interest rate. In contrast, people with fair or bad credit scores will have to manage with high-interest rates on most P2P platforms. However, your appeal would not be rejected unless your score is lower than 580. This gives the people with low credit scores an advantage for credit card debt consolidation.
Remember, P2P platforms do not operate like traditional financial institutions. They have different requirements, terms, and fee/charges. It is essential to familiarize yourself with the differences before you indulge in debt consolidation through Peer-to-Peer lending.
Most reliable websites have a FAQ section to answer any questions you may have regarding their terms and conditions for debt consolidation.
The Final Verdict
Whenever you decide to use a credit card, it is essential to remember that you are borrowing from a company, and ultimately you have to pay it back. At times, people go over their heads when they use credit cards. It is better to keep them for emergencies when you cannot access your regular accounts. Using credit cards daily and not making timely repayments can put you in serious trouble.
If you already have significant debt in different accounts, your best option is to consolidate credit card debt. There are multiple options to choose from that can suit your conditions.
The whole purpose of consolidating credit card debt is to make regular monthly payments and finally eliminate your debt. This allows you to organize your accounts in one place and make timely payments since remembering multiple due dates can be difficult.
