Understanding How Credit Card Consolidation Loans Work
If you are one of the people who has a mountain of debt, chances are that you have already looked into consolidating your credit card debts. While it is an excellent way to get rid of the debts that you have, there are still other ways to solve your problem with debt.
In addition to solving your problem with the consolidation of your credit card debt, other popular methods could be:
- Paying your debt personally
- Transferring of balances
- Interest negotiation
Furthermore, you can consider getting a debt management plan or a debt settlement plan instead. Both of these plans can help you get out of this tough situation and will teach you how to manage your money more efficiently in the future.
But really, how do credit card consolidation loans work?
What is credit card consolidation?
In understanding how do credit card consolidation loans work, it is a strategy that takes all your account balances from different credit cards and pays them altogether monthly. In theory, the new debt will have a lower annual rate, lower your interest rate and a shorter repayment period.
The whole process depends on certain factors like your credit score, the amount of debt, and your credit history. The bank will also look at your investments and home equity, you can use a release equity calculator to find out how much your home’s worth. However, if your ultimate goal at the end is to pay all of your debts, then consolidation is the best decision you can make.
Take note that credit card consolidation can hurt your credit score. That is if the lender checks your credit history thoroughly. Don’t worry, though, as your credit score will only go down a couple of points. If you plan to pay off your debts in due time, those points that you lost will be gained momentarily.
There are specific ways to consolidate your credit card debts; they are as follows:
Working with nonprofit organizations
If you choose to work with counseling organizations, they will review your financial situation and will work with you to create a budgeting plan. They will give you advice as to how you will solve this problem in terms of credit issues, debt management, and budgeting.
However, before approaching one, do a background check on the organization you are interested in. Consult your state attorney general office or the consumer protection agency to see if the organization you are about to approach has a good reputation or not.
Applying for a personal loan
If you are open to applying for a personal loan, you can use it as a way to consolidate your debt. Instead of paying your credit card monthly separately, you can make one payment for the other credit card balances.
If you have a good credit score and history, you can ask your lender for a lower interest rate than the other credit cards that you are paying. Also, personal loans offer flexible repayment conditions. This way, you can pick one service that is beneficial for your current budget.
Using a balance transfer credit card
In its primary sense, a balance transfer is the process that will let you transfer one or more credit card accounts to one credit card.
Balance credit cards often have a 0% annual percentage rate on the account balances that you move on the map. However, the 0% APR is usually just introductory. This means that when the promotion expires, particular interest will be applied. This can be counter-measured if you manage to pay off your debts before the expiration date arrives.
Take note that multiple balances can’t be allowed if the credit cards are from the same lender. Also, always pay on time as paying late can cancel the promotional introductory APR altogether.
Asking for help from family and friends
If your financial situation is looking dire, it might make sense to ask for help from other people, especially from friends and family. If you are willing to ask them for help, you should outline the repayment clearly as well the rest of the terms. Asking for financial support from loved ones means that you don’t have to meet eligibility requirements.
However, if you consider this method, you might strain your relationship with them. Also, if you are unable to pay for the money that you borrowed from them, you might be putting their finances in jeopardy.
Takeaway
Consolidating credit card debt into one payment may seem like a good idea, but if you continue to rack up new debt, it will be useless altogether. Before considering this idea, come up with a strategy that will let you survive within your means and avoid acquiring new debt as much as possible. Lastly, avoid picking a consolidating method that can put your car, house, and retirement at risk.