How Do You Consolidate Credit Card Debt?
The sad fact is that the credit crunch and the recession left a lot of people in the lurch. Some people spent their credit limits not against the realities of the income they had, but against the rate they expected their income to rise. For a while, especially in the late 90s and early 00s, this worked - the economy was growing and income was booming.
But with the coming of the recession, this has changed. People who haven't outright lost their jobs to downsizing have faced pay freezes or even pay cuts to account for corporate losses. Benefits are slashed and people find themselves making up the differences out of pocket, often with you guessed it, their credit cards.
So we find ourselves in ever increasing amounts of debt as we wonder just what the heck went wrong, and how in the world we're going to find our way out of it.
One path that more people are hearing about is credit card consolidation, but just what does that mean, exactly?
Consolidation is a phrase used to cover several different programs, but the core element to them all is the same - your extensive debt is brought down to either one or a small handful of easily managed payments by manipulating the way that your current credit is arranged. It can involve simply changing the number of cards your credit is spread across, or transferring your debt to a new holder.
There are, in general, several paths you can take with consolidating your credit card debt.
1st - Get a credit consolidation program.
This is an option for someone who doesn't know what to do, and needs all the help they can get. It's for people who find themselves underwater with their credit card loans and can't put up with harassing calls from creditors.
With a program, you talk to a bank or lender about your credit situation, and they discuss transferring your total debt limit to their accounts. You now owe the new lender, who will typically reduce the monthly interest rate and late payments while increasing the length of your payment term.
The advantage here is that you generally have a much more manageable monthly payment to make, and can start rebuilding your credit score instead of watching it suffer as you scrape by month to month.
Be aware though that this kind of step usually results in a drastic increase to the total amount of debt you owe. If your situation improves at all, begin paying more than the minimum as soon as you can - this will reduce the total amount of debt faster, thus reducing the extra money you pay out in interest payments over the long term.
2nd - DIY Consolidation!
There is a way you can do credit card consolidation yourself, if you have a good credit score and a strong sense of personal discipline. This is a solution for people with multiple, variable interest credit cards:
Either talk to the bank about consolidating all your debt onto a single one of your cards, or simply use your lowest interest card to 'pay' for the balance on your remaining cards as
much as is possible. If it involves applying for a new low interest card and then transferring the balances, do that if you can.
Whichever exact method you use to do this, it results in all or most of your debt being moved to the card with the lowest interest rate. This can have a very real impact in two areas. First, it reduces the monthly payment - if you are paying 20% interest on one card and 10% on the other, and you can move all your debt to the 10% card, you can seriously reduce the overall monthly payment. Secondly, it reduces the total amount you'll pay over the long term, which is where interest payments really hold families and individuals back. You'll see yourself able to create some sort of savings to hedge against the future, again.
3rd - Get a Consolidation Loan
This is very similar to enrolling in an actual consolidation program - only the particulars are different. If you have a high (mid 700s) credit score, you can talk to your bank about taking out a loan for your credit balance. You use this loan to immediately pay down the entire balance of your credit card, thus achieving a credit score bonus that takes away some of the sting from having to string things along for so long.
After you've paid off the credit cards, you have to pay back the bank of course. However, the terms of the loan once again usually involve lower monthly payments and a lower interest rate, both over a longer period. Again, this will probably increase the total amount you owe, so do what you can to pay it off as soon as possible. But it also gives you more month-to-month control over your finances, so you can put away some savings, improve your health, and generally function in a way you couldn't when buried under a mound of credit card debt.
Be aware that like any loan, this is subject to your credit reputation. It isn't an option that will work as well if you have a low credit score. You may need to provide security or collateral for the loan, so the bank feels they have options in the event of a payment default. Talk to your bank about what terms they intend to offer or require.
Some Last Minute Tips:
There are things you can do to protect yourself against future disasters once you have consolidated your debt.
Specifically, use the savings you make on your monthly payments to set up a rainy day fund. Put aside at least 3-5% of your income each pay period if you can, and just stick it in the bank. Don't touch it, keep it away from yourself as much as you can, and set it aside to protect you in the event things go wrong.
Cut up your credit cards and stick to your debit cards. Don't cancel the credit card accounts - having the credit open keeps your credit history healthy. Just cut up the cards and don't ask for replacements until you've paid off the debt you took out in its entirety. Using your cards too soon after consolidating will just end up hurting you more.