Credit card consolidation is one of the many options that you have to get rid of debt. According to statistics, the average American owns 3 or more credit cards at one time. In most cases, these cards each carry a balance. This is what makes it perfect for consolidation.
When you consolidate credit cards, you are putting them all under one account. The new credit account will be your sole focus from now on. Your original debts will be paid – but that does not mean you are already debt free. You just restructured your debts so it is easier to pay off.
While it is proven to be effective, this debt relief option is not for everyone. It is perfect but only if you have the right debt and financial situation. If you happen to have the wrong financial conditions, this can backfire. Instead of solving your problem, you might be left in a worse situation than when you started.
This is the reason why you need to analyze your financial position and how much debt you owe before you choose to start a credit card consolidation program.
Answer these 4 questions before credit card consolidation
When you analyze this debt solution, you can start by asking yourself 4 important questions.
What is my credit score?
To make credit card consolidation work, you have to open a new credit account. This can be in the form of a 0% balance transfer card or a debt consolidation loan. Both of these will require a good credit score in order to enjoy a low-interest rate (or 0% for a balance transfer). Without a lower interest rate, you are defeating one of the purposes of consolidating credit cards. These cards are notorious for their high-interest rate. In fact, reports reveal that credit card holders paid $100 billion in interest rates and fees in 2018. If you cannot lower your interest rate through a good credit score, then you might want to reconsider using debt consolidation on your credit cards. Maybe debt management is a better option. It will still feel like consolidating debts but it will be with the help of a credit counselor.
Can you afford your payments and make them on time?
Another question that you need to ask yourself is if you can afford your debt payments. As mentioned, credit card consolidation is just about restructuring debts. You paid off the original credit card balance but it was only transferred somewhere else. You still have to pay it all off. There is no debt reduction too. You have to pay for everything that you owe. The only reduction may be in the interest rate – if you have a good credit score. But when it comes to the original balance, you still have to complete that payment. This is the reason why you need to have a stable and steady income. If you cannot afford your payments, you will end up being late – making your credit situation worse. In case your income cannot support all your payments, you might be better off going for debt settlement to have your balance reduced.
What fees will the credit card consolidation program have?
Since the new credit account is needed, you need to check the fees and terms and conditions. Make sure that whatever you can save on the interest rate will not go to the fees that the creditor or lender will charge. These fees will vary between creditors and lenders. For balance transfer cards, there is usually a balance transfer fee of 3%. It will be calculated depending on the amount that you transferred. You should also be on the lookout for hidden charges and penalties that might add to your payments in the future. Calculating these fees will help you decide if this is something that fits your financial situation.
What really caused you to be in debt?
Finally, you should also ask yourself why you got into debt in the first place. Regardless if you use credit card consolidation or another debt solution, it is important for you to analyze the reason for your debt. Is it a lack of emergency fund? Or maybe your budget does not fit your income and lifestyle? It is also possible that you are in debt because you cannot control your spending urges. You need to address the root cause of the problem if you want to make the effects of debt consolidation last. If you do not solve this, you might end up being debt once again. All your hard work to get out of debt might be for nothing.
Three tips to make credit card consolidation a success
Since credit card consolidation is just a repayment tool, you need to make sure that you implement certain financial habits that will make it easier. These are also the habits that can help you sustain the effects of your debt relief program – to ensure that you will not land in the same financial situation again.
Here are some tips that might be useful to you.
Update your budget plan
Check if your current budget plan reflects your credit card consolidation program. If not, then you need to revise it. This will help you see if your income can cover all your expenses and payment obligations. If not, then you need to make adjustments. You have to ensure that you are not overspending. You can also check how you can maximize your debt payments so you can get out of debt faster.
Analyze your spending
While you are in the midst of a debt relief program, it is always advisable to monitor how you spend your money. The goal is to limit your spending so more of your income can go to your debt payment fund. The higher the monthly payments, the faster you can get out of debt. When you have a shorter repayment period, you can save more – especially on interest payments.
Communicate with your creditors
Credit card debts may take a lot out of your finances but you have more control over it than you think. You have every right to communicate with your credit card company to ask them to lower your interest rate. If they inform you that they have plans of increasing the rate, you also have the right to call them to say that you do not want that increase to affect your account. Make it a habit to communicate with them so you can avoid fees and charges that could have been used to increase your debt payments.