Credit Card Consolidation: 5 Best Tips to Do It Right

Credit card debt Credit Card consolidation

Credit Card Consolidation!!

Are your high-interest credit cards putting you in a deeper financial mess?

Some credit cards can carry an interest well above 20% and easily make you drown in interest fees. Not to mention, they can make your monthly payments outrageously high and unmanageable.

While you can’t wipe out debt with a magical wand, there are things you can do to make your payments more manageable.

That is credit card consolidation. 

It’s a debt payoff strategy that takes your multiple credit balances and rolls into a new one.

The idea is to lower or eliminate your interest rate on the new debt. This helps you pay off your debt easier and faster by keeping your payment more manageable.

Generally speaking, there are two types of credit consolidation. One is to take out a low-interest loan and the other is to use a debt management program. 

In this article, we’ll be focusing on the first type of debt consolidation strategy, which is to use a loan. 

It’s certainly an effective way to pay off your debt, and it’s a cheaper way to knock down your consumer debt. 

But there are just as many dangers to debt consolidation as benefits. And choosing this route should be considered carefully. 

Used wisely and sensibly, you are on your way to conquering your debt faster and cheaper. 

If you are thinking of consolidating your credit cards for debt relief, here are 5 tips to do it right.

1. Make Sure It’s a Low-Interest Loan. 

The idea behind debt consolidation with a personal loan is simple. Take out a loan that’s lower in interest to pay off high-interest unsecured debt. 

Generally speaking, loans carry a much lower interest rate than credit cards. Some banks and lenders also run promotions from time to time that can even eliminate interest. 

But you need a good credit score to score a low APR. 

Lenders take a deeper look at your credit score and its history to determine their interest rate on a loan. And if you were often falling behind on your credit card payments, the chances are your credit rating got a hit too. 

And it means it’ll inevitably shoot up your loan APR. 

When discussing with your lender, be sure to ask and confirm the interest rate you are getting on the loan. If it’s higher than your credit card interest rates, it won’t work. 

If this is you, take a look at your credit score to see what’ hurting your number. If late payments are pulling you down, work to set up auto-pay or set a reminder on your calendar to be on time. 

Take measures to diligently repair things that are hurting your credit score. Over time, your score will improve and you can reassess if taking out a loan to consolidate debt works for you. 

2. Get Manageable Monthly Installments

A loan whether it’s a personal or debt consolidation loan is an installment loan. 

Unlike credit card bills, your installment schedule is set. 

This means the loan must be paid back in monthly equal installments. The loan term typically ranges anywhere from 36 to 60 months at an APR you negotiate with your banker. 

Let’s look at how your payment schedule looks like in one scenario. 

Let’s say you take out a $6,000 loan at a 5 % APR with a 3-year term.

With this loan, you are scheduled to pay $180 per month for 36 months. 

That’s $180 you have to commit every month for 36 months. 

While this may not be a big deal to some, for others, it may pose a challenge. 

Especially if are between jobs, a seasonal worker, or contractor, your income may not be stable. 

Before taking out a loan, you need to make sure you can handle your monthly installments month in, month out. 

If installment loans don’t fit your lifestyle and income flows, be sure to check other ways to pay off debt.

3. Don’t Fall Behind On Your Loan Payments

Debt consolidation using a loan can be a great idea for your credit health. That’s because installment loans don’t affect credit scores as much as credit cards do. 

But there is a catch. 

You can’t fall behind on your loan payments. 

Here is an interesting thing. Carrying a loan balance may not negatively influence your credit score just as long as you pay on time. But as soon as you become delinquent, risk you pose to your lender goes up and your score takes a hit. 

If you decide to conquer debt using a loan, make sure you make regular on-time loan payments. 

Your credit score will thank you. 

4. Don’t Close Your Credit Cards

After you pay off your credit card debt, it’s easy to get tempted to close all accounts. 

After all, those are the cards that put you in debt, and you want nothing to do with them. I get it. 

But resist the urge. 

If you are in a financial mess, then chances are, your credit score isn’t so stellar and needs improvements. 

And what can help your score is those paid-credit cards and their available credit. 

For your credit score, more available credit you have the better. That’s because it signals low credit utilization, which is 30% of your credit score. 

By keep those cards open, you can maintain this low credit utilization and high credit limit.

5. Don’t Use Paid-Off Credit Cards

When you see your credit balances hit zero, you’d feel victorious. 

It’s incredibly satisfying and freeing. 

Once your initial victory moment wears off, it’s also easy to feel a bit loose with your spending. 

If you are strapped for cash, it’s too easy to go for your paid-off credit cards with lots of available credit. 

Before you know it, the old spending habits that got you in the financial mess can get you in debt again. And this time, it’ll be even deeper. 

To avoid fall into the trap, I recommend cutting up your paid-off credit cards. If you don’t want to cut them up, at least remove them from your wallet. 

Whatever you do, don’t use your paid-off credit cards. 
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Misato Alexandre

Co-founder

Misato Alexandre is a mom, wife, blogger, and a big saver living in Hawaii. She holds B.A. in Finance and formerly worked at Nomura on Wall Street in NYC.

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