Credit card debt is inevitable. Even though a credit card is a useful financial tool, many cardholders end up having outstanding credit card balances. Once your debt builds up, it will be tougher to know how to pay off your balances fast.
Enter credit card debt consolidation. It is a strategy that makes it easier to manage debt. It rolls out your debt in one payment. Often, it comes with a lower interest rate than what you paid out each month before the consolidation. It also gives your credit score a huge boost.
Should You Use Credit Card Debt Consolidation? Is It a Wise Idea?
It is a sound approach if you want to make it easier to manage your burgeoning debt. This strategy is also effective in helping you reorganize multiple bills with various interest rates.
What is the Best Way to Consolidate Your Debt?
Zero Interest Balance-Transfer Credit Card
Several credit card companies offer this method. You can take advantage of this method by transferring your debts onto this card. During the promo period, though, you need to pay the remaining balance in full.
But to qualify for this prompt, you need an excellent credit score.
Fixed Rate Loan
This is a different method. But it can also help in consolidating your credit card debts. You can take up a loan to pay off our debt. Then, pay back the loan in installments over a certain period.
It is a good option if you have bad credit. However, even if you have good credit, this option may still be a good choice as you are likely to get the lowest rates.
Home Equity Loan
Another way to consolidate your debt is to take out a home equity loan. But it comes with risk. It affects your home or retirement.
Is Consolidating Your Credit Card Debt a Smart Move?
It is a wise decision of your monthly debt payments don’t exceed 50% of your monthly income. And if you have a good credit score, then this can be a smart option.
However, you need to ensure that you have a consistent cash flow to pay for the debt.
For instance, if Suzy has four credit cards with interest rates between 18% and 24%. Because she makes her payments on time, her credit is good. She qualifies for an unsecured debt consolidation loan at a lower interest rate of 7%.
Consolidation can be a promising way for Suzy to pay off her debt. However, she needs to ensure that she pays on time.
Conversely, Suzy can choose to make minimum payments on her credit cards. But it could mean she has to pay the debt off for years while accruing more interest than the principal amount.
Unfortunately, this method of paying off your credit card debt is not always the best option. This is because it does not help you curb the spending habits that started your debt.
It may not be the best solution if you don’t think you can pay off your debt even with reduced payments.
On the other hand, if your debt is small and you can pay it off in six months to one year, then consolidating it is not a good idea.
If that is your case, you can try the debt snowball.
Use Debt Snowball in Paying Off Credit Card Debt
The snowball method means you pay your smallest debts in full first. You get rewarded for the wins. Seeing your debts eliminated one by one will keep you engaged.
It is a different method from debt avalanche, which priories high-interest debt. It can help you save money. However, it takes a lot longer to wipe out your first debt.
When using the snowball method, you must first make a budget that will help cover the minimum monthly payment for each debt.
Arrange the debts according to their balance. But you have to prioritize the smallest balance. Ignore the interest rate on every debt.
If you have extra money, use it to get rid of your smallest debt.
Once you have paid your smallest debt, take the money you have budgeted to pay toward it and use it for the next-smallest debt.
Keep eliminating your debts and divert your freed-up money to your next debt in line.
This solution can save time and money to pay off your highest-interest debt first.
Find Other Ways to Pay More
The best thing about the snowball strategy is that it helps boost your credit score. When you reach a certain score, you may be able to transfer your credit card balance to a lower-rate card. Or you may qualify for a debt consolidation loan.
What If You Could Not Afford To Pay Off Your Credit Card Debt?
You may choose to settle them on your own. Or you can ask for the help of a legitimate credit counseling agency. Another way is to file for bankruptcy.
When you negotiate, you might get a significant discount on the total amount you borrowed. You may arrange for a more favorite payment term. You should also consider talking to a nonprofit credit counseling agency, instead of hiring a for-profit debt management service.
Getting Out of Debt
With the right tools and motivation, you can get out of debt, no matter how huge it is. One way to do that is to make the most of your money.
Build a budget that makes it easy for you to manage your debt. When budgeting, keep all your essential expenses to 50% of your income. For your wants, allocate only 30%. Then, make sure to use 20% of your income for your savings and to pay your debt.
Because you are paying off your debt, use the money from your “wants” category to pay off your debt. It will make it easier for you to wipe out your debt. And you can save on interest.
You should put every extra penny you have toward paying off your debt. Even if you have paid off your debt, you still have an eye on your budget spending. In that way, you don’t have to face the question of whether or not it is a good idea to use credit card debt consolidation.