In recent times many individuals, especially US citizens, are knee-deep in credit card debt. People can incur credit card debt due to many reasons, like medical expenses, extravagant vacations, renovating houses and paying bills due to low income. No matter how you get into debt, you must try to come out of it as soon as possible. You may pursue either credit card debt consolidation, debt settlement, debt management, or even file bankruptcy to wipe off the credit card debt. But remember, debt consolidation has certain advantages over other methods of debt elimination. Before you proceed with the process of credit card debt consolidation, you must know how it works.
What is credit card debt consolidation?
Credit card debt consolidation is a program that allows you to consolidate all your multiple debts into one monthly payment. With debt consolidation, you can lower the interest rate and therefore reduce monthly payments. Thus, credit card debt consolidation helps you pay off your debt as soon as possible. This is the best way to wipeout debt without injuring your credit.
Ways to consolidate credit card debt
- A primary way of consolidating credit card debt is to take out a loan at lower interest rate and merge all the debts into the loan. If you own a home, you may put it up as collateral in order to get a lower interest rate loan. This loan is also known as a home equity loan.
- Another way of consolidating credit card debt is a balance transfer. Transfer the balance on your credit card to a new form of credit that offers zero or low-interest rate.
- You may also apply for a personal loan or unsecured line of credit to consolidate and pay off the credit card debt.
Define your goals
- Amend the inflow of cash. Try to reduce the size of your monthly payments over time so that the amount lowers gradually and eventually increases the inflow of your cash.
- Rid your debt sooner. Try to erase your debts as fast as possible. This will enable you to save some money and prevent your credit report from getting damaged.
- Do not miss payments. Never miss monthly payments and bills. That would certainly add up to the total debt amount — and create stress as well.
A few important tips before considering debt consolidation
- Before you choose the method of consolidating your credit card debt, you must contact creditors in order to find out the outstanding balance on each of your accounts. Then, obtain a personal loan or unsecured loan to pay each creditor in full.
- If you are planning to transfer your balance you will have to provide your creditor with billing information, an account number and the balance on the account you are transferring. After you have paid off each account in full, you then have to decide whether you want to close the accounts or want to leave them open.
The difference between debt consolidation and debt management
There are many people who think that debt consolidation is the same as debt management and credit counseling. The fact is debt management and credit counseling involves debt consolidation through a company. When you hire the services of a credit counselor or a debt management company, they negotiate with creditors and reduce the interest rate on each account. Then they collect a fixed monthly payment from you and disburse it to creditors in order to pay off your existing credit card debt.
Debt consolidation is the most viable method to pay off the credit card debt. But before going for this option, you must consider some factors associated with it. If you take out a consolidation loan while putting up collateral, you must remember that you cannot afford to miss a monthly payment. If you default on loan repayment, you may lose your asset. So make sure to choose the debt consolidation option through giving it careful thought and analyzing your fiscal situation.
(Photo credit: Colorful stack of credit cards via Shutterstock)