In a lot of ways, credit card debt consolidation is pushing the reset button on your finances. The trick to being successful lies in knowing exactly when to push the button. You have to see trouble coming on the horizon and take advantage of a beneficial consolidation program before things go too far. In other words, you absolutely can get a fresh start with credit card consolidation — if you get the timing right.
Here’s what you need to know.
Your Credit Score is Key
Qualifying for a rate capable of beating the aggregate interest charges on your current debts is one of the primary factors of a successful consolidation. After all, this is where your primary savings will originate. Yes, getting a shorter payoff term is important too; however, the interest rate for which you qualify can make or break the deal.
Therefore, your first move should be to get copies of all three of your credit reports and review them for accuracy. Be certain you recognize every entry and
all your payment activities are accurately reflected. Discrepancies could lower your credit score, which in turn will impose a higher interest rate on your consolidation loan.
Typical Consolidation Strategies
Credit card consolidation generally falls into one of four categories: balance transfers, personal loans, home equity loans, and debt management programs. Of the four, debt management is the least demanding in terms of your credit history. The others all require you to have “good” scores or better to reap the most significant benefit.
Credit card balance transfers can lower your interest rate considerably — during the introductory period. In fact, zero percent interest deals are quite common for a window of up to 24 months or so. After that, the rate can exceed 25 percent. Thus, the best play when looking to get a fresh start with credit card consolidation is to transfer only what you can afford to pay off during the duration of the promotion. Otherwise, you could be looking at rates even higher than the ones you left behind.
An unsecured personal loan from a bank, credit union, or online financial organization can be a smart way to go as well. The interest rate will be higher than that of a transfer card, but you can also move more debt and have fixed payments over a longer amount of time. You’ll need a very strong credit score to make this option worthwhile, though. There will also be loan origination fees to consider.
Much less costly than personal loans in terms of interest payments, using the equity in your home to consolidate credit card debt can save you money. However, these savings come at a huge risk. Your house could be foreclosed upon, leaving you homeless if you default on the loan. Repayment periods are usually longer than that of personal loans as well, which could mean you’ll pay more overall. You’ll also encounter related fees.
Working with a credit counselor to devise a payoff strategy has some definite advantages. For one, you’ll have a debt professional working with you to ensure the choices you make are the most favorable. Interest rate reductions and fee waivers usually result as well. However, you’ll also give over control of your finances to a third party, which could entail closing credit accounts and being barred from using credit during the management period. You’ll pay a fee for this service, too.
The Bottom Line?
Yes, you can get a fresh start with credit card consolidation. Moreover, there are a number of different approaches to doing so. The key is to assess your situation to determine which strategy makes the most sense for you and acting while your credit score remains strong.