Ruchi Gupta

What Is Credit Card Debt Consolidation?

Credit cards offer a very convenient way to make payments. Buying airline tickets, paying your hotel bills, or even purchasing your weekly groceries is easy. You don’t need to write a check or carry large amounts of cash. Simply swipe your card and the transaction is complete.

A credit card offers other advantages as well. You get a free credit period that may extend up to a month or more.

You also get the facility of rolling over your debt. Pay just 5% or less of the total amount due and postpone the remaining payment for later. Of course, you will have to pay interest on the amount that you roll over.

In fact, a significant percentage of credit card users don’t pay the entire balance on their card statements when they receive their monthly bill. According to a recent report, the country’s total credit card debt stands at $905 billion. The average American family owes their card issuer $15,654. This amount carries an average interest rate of 13.7%.

In many instances, an individual may have multiple credit cards and carry an outstanding balance on each of them. If your income is insufficient, it could become difficult, even impossible, to meet all your repayment obligations.

If this happens, what are your options? One way out is to consolidate your credit card debt. Instead of struggling to make several payments every month, you can make a single payment that you can afford.

How credit card debt consolidation works

What is the procedure that you have to follow to consolidate your credit card debt? There are several options that are available:

Transferring all your dues to one card – you can transfer all your balances to a single card. Of course, if you plan to do this, you should have a good credit score. Your new card will carry all your debt. Instead of paying half a dozen banks and credit card companies every month, simply make one payment.

If you shop around, you may even be able to get a card that carries a very low rate of interest. Some cards offer an interest-free period for the first 12 or 18 months. But remember that you would have to pay a balance transfer fee.

Personal loan – if you don’t want yet another credit card, a personal loan offers another way out. Use the loan proceeds to pay off the dues on all your cards. Subsequently, you will have to repay the personal loan.

It is important that you don’t default on the repayments towards your new loan. If you do this, it could impact your credit score and make it difficult to borrow in future.

Debt management – what if your total dues are just too high and you can’t manage your repayments despite your best efforts? In such a situation, it may be a good idea to speak with a credit counseling agency about a debt management plan.

Once this plan is in place, you will be required to make a regular monthly payment to the agency and not to the credit card companies. The debt management agency will pay your creditors on your behalf. It may also be able to negotiate a lower rate of interest for you.

Should you consolidate your credit card debt?

Absolutely, yes. Credit card debt consolidation offers several benefits:

  • You can modify your payment terms to accommodate the level of your income. For example, if you decide to pay off your card dues with a personal loan, you could opt for a longer term. This will lower your monthly repayment instalment.

  • It is possible to lower the rate of interest that you are paying. Credit cards usually carry a high APR. The credit card that you use to consolidate your debt may carry an interest-free period. Even a personal loan will usually be available at a rate that is lower than your cards carry.

  • Your life will be much simpler. Instead of making several payments every month, you will have to remember to make only one payment.

Some precautions that you should take

While there are many advantages to credit card debt consolidation, you need to exercise caution in certain areas. If you pay off all your credit card dues with a personal loan, you will suddenly have a large credit limit available to you. Avoid the temptation to start using your cards. You may rack up an unmanageable level of debt once again.

Starting a credit card debt consolidation program can make you complacent as well. But you need to bear in mind that all you have accomplished is that you have transferred your debts to another lender. You still have to repay the total loan amount.

If the consolidation program is to be really effective, you must change your spending habits. When you use your credit cards, you should maintain your debt at a level that you can comfortably repay.