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Ben Lüthi is a financial journalist who writes about credit cards, insurance, student loans and other financial topics. His work has appeared in publications such as USA Today, The Christian Science Monitor, Success Magazine, Time Money, and more.
- 1 Will Debt Consolidation Help My Credit
- 2 How To Consolidate Debt Without Hurting Your Credit
- 3 How To Consolidate Debt And Boost Your Credit Score
- 4 Ways To Consolidate Credit Card Debt
- 5 Ways To Consolidate Credit Card Debt
- 6 Credit Card Debt Consolidation: 10 Traps To Avoid When You Consolidate
- 7 Of The Best Debt Consolidation Loans For Fair Credit
Will Debt Consolidation Help My Credit
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How To Consolidate Debt Without Hurting Your Credit
According to the Federal Reserve, Americans have more credit card debt than ever before, totaling $1.029 trillion as of December 2017. That’s an average of $8,732 per household, in follow current social data.
If you have credit card debt, taking out a credit card consolidation loan can help you lower your interest rate and pay off your debt faster. However, according to a new study, only 52% of people with credit card debt of more than $6,000 have ever been consolidated.
Find out why many people are reluctant to try to consolidate and get tips on how to pay off your credit card debt faster.
We surveyed over 1,000 people with credit card debt over $6,000 and found the following:
How Does Debt Consolidation Affect Your Credit Score?
If you pay off your credit card debt every month, you won’t have to consolidate your debts. However, keeping a balance can put your financial well-being at risk.
For example, 58% of people we surveyed have at least $6,000 on their credit cards for more than a year, and 43% have more than $15,000 in credit card debt.
High interest rates don’t help, and nearly half of the people we surveyed pay more than the average interest rate, which the Federal Reserve sets at 14.99%.
In some cases, you may be able to negotiate your interest rate, but credit card providers don’t always cooperate.
Best Debt Consolidation Loans Of October 2023
The combination of high interest rates and high balances can have a negative impact on your financial health. For example, let’s say you have $15,000 in credit card debt with an APR of 14.99% and a minimum payment of $300.
Assuming you stop using your credit card and pay at least every month, it will take more than six and a half years to pay off your debt. And you’ll spend $8,676 in interest along the way.
Credit card debt can also damage your relationships. For example, 32% of people we surveyed kept their credit card debt a secret from significant others because they were embarrassed, in denial, or believed it would be a breach of contract.
48 percent of people we surveyed have never tried to pay off their credit card debt. When we asked them why, many gave more than one answer, which means that the decision can be difficult.
If I Pay Off A Credit Card, Will My Credit Score Change?
In general, these concerns are reasonable. But for many people, understanding how to integrate can help clear the way.
Of course, credit card consolidation loans are not for everyone. However, for those who qualify, they should be considered as a way to eliminate toxic debt.
If you have good credit and pay a higher than average interest rate, you may be able to get a lower interest rate with a consolidation loan.
But this time, let’s assume that you apply for a personal consolidation loan with an APR of 10.00% and a repayment period of five years.
What Is Debt Consolidation And Is It A Good Idea?
In this scenario, you’ll be debt-free after five years and use $4,122 in interest, which will cut your interest payments by more than half. Here’s the bottom line: your monthly payment will increase by $19.
Credit cards are complicated because they don’t have set repayment terms like installment loans do. In fact, there are situations where you may find yourself in permanent credit card debt even if you pay the minimum amount every month.
Combining your credit card balances with your loan application can help you be more disciplined about paying. With a fixed monthly payment and a fixed repayment period, you always have the end in mind.
If you have a lot of credit card debt, it can be difficult to remember how much you owe and when you’re due each month.
How To Consolidate Debt And Boost Your Credit Score
“With a personal loan, you don’t have to keep up with a lot of credit card payments,” said Alia Dudum, millennial finance expert at LendingClub. Instead, you can consolidate all of your credit card balances into one easy payment.
If you have the same concerns as the people we talked to, you may not be sure if a merger is right for you. There are a few things to consider here.
Unfortunately, there is no way to know exactly how credit card debt consolidation will affect your credit score. But here are some factors that influence the decision.
Your credit utilization ratio is calculated by dividing the credit card balance by its credit limit. Then do some calculations on all your cards together.
Ways To Consolidate Credit Card Debt
The higher your credit utilization, the more damaging it is to your credit score. So if you pay off a high-use credit card, your score will improve. However, remember that if you consolidate your credit card debt and accumulate more, the additional debt can damage your credit score.
How much you owe is the second biggest factor in your FICO credit score. Although you are taking out a new loan, you are not taking out a new loan because you are using the loan to pay off an existing loan. Therefore this amount should not be affected.
Every time you apply for a loan, the lender performs a full credit check on your credit report, which can temporarily deduct several points from your credit score. However, the negative effect is usually not long-lasting, especially if you don’t take out loans regularly.
Some debt relief companies offer to help you negotiate with your creditors and arrange a better payment plan or pay less than what you owe.
Ways To Consolidate Credit Card Debt
“Debt relief or settlement companies often say they can work with your creditors to reduce the amount you owe, but that doesn’t mean your loan will be discharged,” Dudum said. “In fact, your loan may continue to accrue interest or penalties until it is paid off.”
That’s because sometimes these companies encourage you to stop paying with your credit card. “If you can’t pay all or most of your debts with the company, the collection of fees and charges can wipe out any savings on paid debts,” Dudum added.
In some cases, these companies want to rip you off or charge you fees for things you can do yourself for free.
Therefore, we recommend avoiding charity companies. Instead, consider applying for a personal loan that will help you consolidate your debts. Banks, credit unions and online lenders offer these loans, and many of them do not charge fees to make the loan for you.
Credit Card Debt Consolidation: 10 Traps To Avoid When You Consolidate
It is true that if you have a low credit score, you may not be approved for a loan, let alone a loan with good interest.
“[Lenders] look at your application, your credit report and other information to estimate the likelihood that you will be able to repay your loan,” said Dudum. “Lower credit risks will be offered a lower APR, and higher credit risks will be offered a higher APR.”
If your credit is good but you’re not sure if you qualify for a good interest rate, many loan companies let you check your interest rate without a hard credit check.
In general, applying for a personal loan to consolidate your credit card debt is an easy process. Once you receive the loan payment in your bank account, you can use it to pay off your credit cards.
Of The Best Debt Consolidation Loans For Fair Credit
Although you may run into a few problems along the way, the time and money you can save by consolidating is well worth the upfront work.
In most cases, lenders offer several payment options so that you can choose how long you have to repay the loan. The shorter your payment term, the higher your monthly payment will be. But if you can afford it, you’ll get out of debt faster and pay less interest.
If you want to lower the monthly rate, you can choose a longer term. Remember that you will pay in the end
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