Credit Card Debt Consolidation

Credit cards can seem like an immediate solution to monetary problems.

Marketing gimmicks by lenders along with increasing social pressures to live a certain standard of living can pull many people into the lure of credit cards.

Add to this, if you decide to take up multiple credit cards, your debt capacity can soon take a toll for the worse.

In a survey carried out by TransUnion, some surprising revelations were brought to the limelight.

At a time when Canada’s population was estimated to be approximately 35 million, there were nearly 43 million credit cards in use in the country.

This glimpse is an apt description of the dependence of people on credit cards today.

However, before you begin to panic or worry about your accumulating credit card debt, there are some ways to consolidate it.

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How Does Credit Card Debt Consolidation Work?

Credit card debt consolidation is nothing but accumulating all your credit card debt in one place.

When you carry debt from multiple high-interest cards, you can combine it all under one balance to make it more easy and affordable to pay off the loan.

The consolidated credit card bill ideally accounts for a lowered rate of interest.

By consolidating debt, you lower the liability of your loan and also reduce the total cost of interest you pay every month.

Benefits of Credit Card Debt Consolidation

There is no denying the fact that despite the ease of liquidity, credit cards can come with very high interests that can be difficult to manage along with other routine expenses, emergency health expenses, educations loans, etc.

Debt consolidation is one of the most effective options for people under pressure with multiple card loans.

Here are some benefits:

  • Credit card debt consolidation lessens the total amount due to be paid each month.
  • It can cut the debt tenure considerably
  • With a reduced rate of interest, the minimum monthly payments seem a lot less expensive
  • Improves your credit score in some cases, after you have successfully paid off all the outstanding debt.

In order to consolidate your debt, you need to approach a financial institution or a credit counselor.

Here’s how you can begin:

Make a note of your debt: It is important to know and understand how much money you owe in credit card debts. Document all your credit card numbers, account numbers, interest rate charged on each card, your current financial balance, etc., on a piece of paper to ascertain where you stand.

Account other expenses: After carefully noting down all information surrounding your credit card debt, the next step is to calculate your monthly budget.
Take into consideration your income from all possible sources like your salary from work, interest from investments, the sale of any asset, inheritance in the form of an estate, etc. Now subtract your expenses from your income. This should include recurring expenses like rent, gas, food and grocery bills, etc., as well as contributions made to a savings account or retirement fund. This will help you narrow down your budget to a figure that you can afford to pay in interest every month.

Contact a financial advisor: To proceed with credit card consolidation, it is imperative to get in touch with a professional credit counselor and a licensed insolvency trustee. These professionals can study your unique situation based on your income, expenses, liabilities, and other financial goals and suggest you the most suitable options to help you consolidate your debt. However, remember to be completely transparent and honest in your conversations with these experts. Hiding facts or misrepresenting information can harm you rather than benefit you in any way.

Here are some ways to consolidate debt:

Debt Consolidation Loan

In this option, you can another loan from a bank to pay off your existing debt.

Usually a bank or a finance company offers people one loan to pay off the cumulative balance of their outstanding credit card bills.

The fees charged by the banks are also low and so are the interest rates.

Moreover, loan applicants can consolidate their older debts under one monthly loan payment.

Banks generally charge around 7% to 12% for debt consolidated loans, whereas, finance companies can charge somewhere between 14% and 30%, depending on whether or not you sign a collateral.

However, in order to apply for a bank consolidation loan, you must have a good credit score.

Sometimes the interest rates for unsecured loans may also be higher than home equity loans.

Banks may also demand for a co-signer on secured loans.

In such cases, you must carefully calculate your overall expenses before considering to go for this option.

Home Equity Loan or Refinance Mortgage

Refinancing, second mortgage, or a home equity loan is another way to consolidate credit card debt.

Much like the name suggest, under this option, the bank lends you money against your house.

However, you do not have to sign over your entire house as collateral.

Only a certain portion of your house is considered for the loan.

For example, if a house is estimated to be of a value of approximately $100,000, and your mortgage is fixed at $80,000, you would then own $20,000 of your house.

Applicants can take out mortgages from the value of their home to pay off debts.

The process of using home equity as a debt consolidation instrument can differ for each bank, so it’s advisable to consult a bank before considering this option.

However, the interest rates for this option are usually low and the payment methods are quite flexible.

But it is important to own a home to be eligible for a home equity.

Line of Credit

A line of credit, also known as an overdraft can either be secured or unsecured.

If you qualify for a line of credit, your bank converts your bank debit card into a credit card.

You can then use this card just like a credit card but with the exception of a fixed limit.

You can then pay a minimum payment each month while the rest gets carried forward to the next month.

However, line of credits too can come with high interest rates.

Some banks charge as much as 20% per month on transactions.

Moreover, even though they offer freedom and flexibility to manage your finances, they can be hard to maintain especially for people who are unable to curb their expenses.

Consolidating Credit Cards

Instead of a loan, you can also simply consolidate all your credit cards under one and enjoy a low interest rate.

Combining the debt under one card can also reduce the time frame of the debt tenure.

Credit card companies offer low interest rates for promotions, etc.

This is the ideal time to consolidate your debts.

Having all your debt in one place that be much more practical to keep a track off on a monthly basis.

It also allows for greater flexibility in paying the minimum balance of one card as opposed to many.

However, if you already have a consolidation loan, you may not qualify for credit card consolidation.

Moreover, low promotional rates are time specific and may only be available on special occasions, festivals, etc.

Debt Management Program

A Debt Management Program consolidates all payments into one payment scheduled for each month.

However, your creditors need to approve such a program before you hop on board.

You will also require a non-profit credit counselor to recommend your name for such a program to your creditors.

The program allows you a period of five years to pay off all your credit card debt.

The biggest advantage of this option is that it comes with very low rates of interest and sometimes no interest at all.

Your credit score also improves automatically two years after successfully settling your debt.

But it may be hard to get all your creditors to agree.

Debt Settlement

In a debt settlement, you can offer to pay the entire debt amount in lump sum instead of incurring the costs of interest each month.

This can reduce your overall liability over a period of time.

However, finding the funds to pay off credit card debt in one go can be tough for people.

If your creditor agrees to settle the debt in one payment, they can no longer charge you fees after the settlement date.

This option can most ideally help someone who has suffered from an illness or disability hampering their ability to work or earn.

The biggest advantage is the waiver on interest that you would otherwise be paying each month.

It is also a quick way to repair your credit score.

But being able to gather large amounts of funds can be tricky for most people.

To sum it up

Financial advisors also suggest people to never be completely dependent on their credit cards as this leads to an unhealthy dependable relationship with debt.

Try to use your card in emergencies alone in order to reduce your liabilities.

However, if you do find yourself in a situation where your credit card debt is towering over your other financial goals, credit card debt consolidation techniques can be of considerable help.

Your debt consolidation options will depend on how much debt you have and the income you take home.

You can only consolidate unsecured debts, but that can also make it easier to make payments on your secured debt – such as your mortgage, for example.

Regardless, consolidating your debts is a great option to get your finances under control and allows you to save on interest charges.

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