A Beginner’s Manual to Consolidate Your Credit Card Debt

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Consolidate Credit Card Debt

Credit card debt can be financially crippling. Multiple debts from numerous creditors can cause lots of stress. Knowing how to consolidate credit card debt is crucial if you find yourself in this situation. You will need to put all of that debt into one easy place to manage your consolidated debt and pay it off monthly. Ideally, your single credit card debt will come with lower interest rates than the debts that it is covering as well as a shorter term. By the way, you’re not alone, the average household now owes more than $5,000 in credit card debt.

Why should I consolidate credit card debt?

The main reason to consolidate credit card debt is to save yourself money. It is not just credit card debt that can go through consolidation. You can also consolidate student loans, medical bills, payday loans, and all other forms of unsecured loans and debt. However, credit card debt is particularly burdensome as the interest rate is higher than nearly all other debts you may have. That high-interest rate is also variable as opposed to fixed. That means the rate you initially agreed on your credit card will increase over time. Each month, you are paying more and more. Consolidating this debt will remove the variable interest rate and replace it with a fixed-rate loan. Doing this makes your debt much more predictable. 

Saving money is always nice, but you may also want to clear up your debt, so you have one less monthly payment. By consolidating your loan, you can reduce the amount of time required to pay off your debt. To reduce the term, it’s often recommended that you use a personal credit card consolidation loan.

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How can I consolidate my loan?

There are a few options for you to consolidate credit card debt. The solution that works best for you will depend on the amount of your debt, your credit score, and credit history as well as your general financial situation. No matter the option, you should expect the process to take time. You may need to fill out an application and then be approved. The application process is counted as a hard credit pull, so it will hurt your credit score, though only by a few points. Your best options for debt consolidation are:

Personal consolidation loan

A personal loan is a simple solution to a stressful problem. You are taking your credit card debt from multiple creditors and putting it into a single loan. For your best chance at getting the most out of a personal loan, you need an excellent credit score. A high FICO score is essential to securing a better interest rate than the one you already have. To get even better interest rates, you should look to use online credit unions as opposed to banks. Online loan issuers offer some of the best interest rates.

A personal loan will also allow you to reassess your loan terms. You can negotiate with your loan officer for the loan to be paid off more quickly if you find yourself in a better financial situation. Alternatively, you can also ask for more time because you need some breathing room. Your monthly payments will be less, but you will end up paying more in the long run.

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With regard to how much money you can save consolidating your loan, here is an example.

Let’s say your collective outstanding credit card debt is $17,000 with an average 19% interest rate. Now you consolidate that debt into a personal loan with a 10% interest rate with a term of three years. Each month, you would save $201 with total savings of $1,252. All your debt is now in one package, and you have saved over $1,000. It’s a win-win situation. To figure out your possible savings, you should use a debt consolidation calculator.

A downside to a personal loan is the origination fee that comes with it. This fee is usually between 1% and 5% of the loan amount and can hit your savings before you have even started. Many loan issuers will pay your credit card debt off directly, meaning you never see the actual funds. Such terms are best if you don’t have much self-control.

The Best Personal Consolidation Loan Options

There are multiple debt consolidation loans available to you, but not all are equal. If you have the required credit score, you should be searching for the best terms. A selection of the best options for you to consider are:

Marcus by Goldman Sachs – For those who have good credit

An unsecured personal loan from Marcus by Goldman Sachs comes with both competitive interest rates and no fees. There is no origination fee or prepayment fee for you to be concerned about. Lack of an origination fee is standard for top-ranked lenders, but a standout point with the Marcus personal loan is that they do not charge late fees. No late fees can alleviate stress.

However, you are using this loan to get out of debt so you should keep your payments up to date. A Marcus unsecured personal loan requires a FICO 9 credit score of 660 or higher. In return for this, you can expect to receive an interest rate between 6.99% and 23.99%. Loan terms range from three to six years with the borrowing amount being between $3,500 and $30,000. 

Discover – For those who require flexibility with their repayments

With a good credit score of 660 or more, you can secure a loan from Discover with an amount between $2,500 and $35,000. Like the Marcus loan, there are no origination or prepayment fees. Interest rates start at 6.99% and go up to 24.99%. The repayment terms of the loans offered range between three and seven years. 

Discover loans are flexible because they allow you to change the payment due date to best suit your current financial situation. There is a late fee of $39 if you fail to make your payments by your selected date. 

Taking out a loan with Discover specifically for debt consolidation means you will have to commit at least 70% of that loan to pay off your credit card debt. This term, combined with the fact that you can pick your payment date, is excellent for customers who struggle to make payments regularly. You can be sure that at least some of your credit card debt is definitely paid off and then you can start making payments back on your terms. With a review score of 4.9 out of 5, Discover must be doing something right.

Payoff – For those who need a plan for getting debt free

Payoff is a lender that aims to help people pay off credit card debt. For that reason, they do more than issue a loan. Payoff will take the time to set you up with a debt management program that can help you take back control of your outstanding debt. Interest rates for Payoff loans start at 5.99% and can go up to 24.99%. Loan amounts range from $5,000 to $35,000 with the term being between two and five years.

Unfortunately, Payoff does charge an origination fee that can be between 2% and 5%. The amount you end up paying will depend on your credit score. The minimum credit score required is a FICO score of 640 or higher. You also need a debt-to-income ratio of 50% or less to be eligible. The fact that Payoff can set you up with a payment plan is a bonus, but they do not pay the loan directly to the creditors of your debt. Instead, the loan amount is deposited into your account, meaning you will need self-control to make the most of the plan offered.  

Avant – For those who have a less-than-perfect credit score

Avant only requires a credit score of 580 or more. This is not a bad credit score by any means, but it is lower than the requirements of other debt consolidation companies on this list. With that score, you can expect an interest rate to be between 9.95% and 35.99%. Payment terms are available for two to five years. If payment is made ten days after the scheduled due date, then a $25 fee will apply.  

The stand out point with Avant as well as the low credit score requirement is that you can receive the funds from your consolidated loan in as little as a day. Instant money is excellent for those who want to deal with their debt as soon as possible. 

Lending Club – For those who want to use a marketplace as opposed to a bank or credit union

Lending Club is a loan marketplace where your loan will be funded in amounts of $25 or more until it is completely covered. 

The loans from Lending Club come in amounts ranging from $1,000 to $40,000 with a term of three to five years. You do need a credit score of 600 or more to make use of the marketplace. In terms of interest, you can expect a rate between 6.95% and 35.89% APR. There is also an origination fee between 1% and 6% with the final amount depending on your credit score.  

0% balance transfer card

You aim to consolidate your debt, and you can reach this goal with another credit card. More specifically, a 0% balance transfer credit card. This type of credit card offers an introductory period where you can transfer the balance of other credit cards to a single card with 0% interest on the amount you transfer.

Like the personal loan, you will need a good credit score to make use of this debt consolidation method. You will also have to budget an amount to pay off the debt you transfer. The 0% interest is not indefinite, so you should make sure you can pay off as much as possible in that period. Once that period has expired, you will find the interest return to what is standard for a credit card. You also have to cover an actual balance transfer fee, which is typically 2% or 3%. In addition to a transfer fee, there are also annual fees that come with the card. Some more downsides to this option include:

  • Not being able to transfer debt from cards that come from the same issuer.
  • Balance transfer cards will come with a credit limit set by the issuer. Your debt may be more than this amount, so you will not be able to transfer it all over if this is the case. 

A balance transfer card is not a bad option, but you must have a high credit score to make it work. You must also have the money in the period before the interest reverts to standard. This period usually is between 12 and 18 months. 

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Consolidate Credit Card Debt

What are the best 0% balance transfer cards?

The best 0% balance transfer card comes down to the amount of time that 0% interest comes offered. The more time you have, the better chance you have of paying off your debt. You also want to ensure that your new card limit is not lower than what you owe. In addition, you should ensure that the card has minimal or zero fees for each amount you transfer to your new card. 

Some of the best options for 0% balance transfer cards include:

Citi Simplicity Card – For those who need a longer 0% introductory balance transfer fee period

The Citi Simplicity Card comes with one of the most extended 0% introductory balance transfer offers available. But how long? You will get 21 months of 0% APR on balance transfers starting from the date of your first transfer. Unfortunately, all transfers need to happen within four months of your account opening. Once the 21-month period has passed your balance transfer, APR will set to between 16.74% and 26.74%.

Each time you transfer a balance to your new Citi Simplicity card, you will see a charge of either 5% or $5, whichever is greater. This card is excellent for those who need that extra time to pay off debt, though it does not give you much time to get your finances in order. If you have the cash to pay off your debt earlier than the 21 months, then you will be better off with a card that charges lower fees. 

Chase Slate – For those who want to make transfers with no fee

The Chase Slate card comes with an introductory 0% APR on balance transfers for the first 15 months from opening your account. After that period, you can expect the APR of the card to rise to between 17.24% and 25.99%. The 0% APR period is not what stands out on this card. Instead, this card will charge no balance transfer fee for the first 60 days. A fee of $5 or 5% (whichever is highest) applies once that period has passed. There is a late payment fee that can vary depending on the amount outstanding on the card. The highest late fee you can expect to pay is $37, which is applicable when you have an unpaid credit card balance of $250 or more. 

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Capital One Quicksilver Rewards Credit Card – For those who will make ongoing balance transfers

The Capital One Quicksilver card gives you the benefits of a 0% balance transfer period that lasts for 15 months. The Citi Simplicity card offers a more extended period, but unlike the Citi card, Capital One has no time limit for transferring a balance to your new card. There is a balance transfer fee of 3%, which you will need to cover to take advantage of the initial terms. Once the initial period expires, you can expect a variable interest rate of 16.24% to 26.24%. The Capital One Quicksilver Rewards Card does offer cashback rewards on purchases you make. The unlimited cashback rate of 1.5% on all purchases can be tempting, but should not be your focus. You are looking to avoid debt, so building more is not advisable.  

BankAmericard – For those who want 0% APR on their balance transfers as well as no fees on transfers to the card

BankAmericard offers the best of both worlds for its users. There is an introductory 0% APR balance transfer that allows it to make this list. The 0% APR lasts for 60 days. Once that period has expired, your interest rate will go up to a variable interest rate range of 14.99% to 24.99%. This card offers the best of both worlds because there is also no actual fee for making a transfer to the card in that introductory period. Once the 60 days is up, the charge of 3% or $10 of the amount, whichever is higher, will apply per transfer. The 60 days is not the most extensive period on this list and comes further limited by the fact that the offer is only valid for the first 15 billing cycles. There is also a late payment fee of $38 that comes with this card. 

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Work with a non-profit credit counseling organization

Sometimes the problem of amassed credit card debt is not one you can solve yourself. If this is the case, then you can seek assistance from a credit counseling organization to help with your debt management. A credit counselor will help you review your financial situation and then put together a debt management plan to help you best tackle your debt. This plan usually consists of a single monthly payment being set up by the counselor. The counselor then uses that amount to pay off your outstanding credit card debts. A credit counselor may also be able to negotiate new debt settlement terms with the creditors that you owe. New terms can include a lower interest rate or a longer-term for payment. 

As your debt starts to get paid off, you will see your credit score rise. These regular payments are ideal as they open up new options to you for dealing with your debt. However, in exchange for their services, a credit counselor may request you to refrain from applying for new credit or even using your current credit. Some credit counselors may also charge a fee for their services.

Before committing to any credit counseling organization, you should ensure they are legitimate. One such example of a legitimate company is National Debt Relief.

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Other options for credit card debt consolidation

The options listed above are the best ways to approach debt consolidation. However, they are not the only ways. There are other ways for you to re-manage your finances; however, the risks can outweigh the rewards if you are not careful.

Ask for help from family and friends

Unfortunately, the truth is that if you need to consolidate your credit card debt, you have been overspending on too many credit cards. The fault is your own, but friends and family may be willing to help you in this difficult time. Borrowing from close friends or family will depend on how much you owe as well as your overall finances. You should ensure you clearly outline the terms of this loan as well as ensuring they are agreeable to all parties involved.

The benefit of borrowing from someone you know is that there are minimum credit requirements. However, you should consider the consequences of such a loan. Owing money to a friend or family member can put a strain on a relationship. If you are unable to pay off your loan, then you are also putting their finances at risk.

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Take out a 401(k) loan

Taking money out against your employment retirement fund is not a good idea. If you lose your job, you will have to pay back the borrowed amount immediately. Failing to do so can see you hit with penalties. However, if it is the only option for you, then you may not have much choice. A retirement account loan does not require a credit check, so your credit score is irrelevant.

Additionally, the interest rates of this type of loan are much less than a personal loan from the bank. Taking out a 401(k) should be a last resort option. You lose money from your retirement fund, end up with a loan you can’t pay, and then you get stuck with a penalty fee, which adds salt to the wound.  

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Home equity loan, home equity line of credit, and home cash-out refinancing

Consolidate Credit Card Debt

A home equity loan can be a source of cash for almost anything. The interest rates on this type of loan are fixed and often lower than a personal loan. You are also not required to provide your credit score for this type of loan. 

Up until now, this sounds like a great option. However, if you fail to make the repayment for this loan, you can lose your home. Just like a 401(k) loan, you should be sure you can pay back the loaned amount before making such a commitment.

HELOC 

You can also use your home equity as a line of credit. Such a line of credit is known as a HELOC. A HELOC typically requires interest-only payments for a set period that is usually ten years. The low minimum payments should not entice you as you won’t pay off your loan unless you pay more than that minimum. Again, because a HELOC comes tied to your home, you risk losing it if you can’t make the payments. 

If you have the equity built up in your home, then you can consider cash-out refinancing. Refinancing is the process of taking out a mortgage that is higher than the value of the property. You then receive the difference in cash that you can use to pay off your creditors. This option will give you a low-interest loan rate when compared to other options, but you must ensure you have enough to pay back the amount borrowed. 

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The best approach for consolidating credit card debt

How you combat your credit card debt will depend on the options available to you. If you have a steady income and generally good credit score, then you should seek out a personal loan for debt consolidation purposes. Both Discover and Marcus by Goldman Sachs are great options with similar terms, though Discover lets you tailor your payments to your liking. In addition, 0% balance transfer credit cards are also a good option for debt consolidation, but because they are credit cards, there is the chance that you do more harm to your credit report than good.

Even if you have a good credit score, a trip to a non-profit counseling organization can help set you on the path to becoming debt-free.

The other options listed can also help with debt consolidation, but the risk may not be worth it. Would you want the subject of how much money you owe your uncle coming up at every Thanksgiving dinner? If you are exploring those options, then you may not have any others.

A 401(k) loan or a loan on your home equity should be a last resort. If things go wrong, you can find yourself in a hole that you may not be able to climb out of. 

No matter how you resolve your credit card debt, you should ensure to keep on top of your credit utilization once you have your finances in order.

Have you used any form of debt consolidation? Has this list given you more options for handling debt from credit card companies than you had before?

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