How Credit Card Consolidation Can Help Your Financial Situation

How Credit Card Consolidation Can Help Your Financial Situation

One of the most significant ways to get into debt is by applying for and owning many different credit cards. Often, this is because the stores and credit card companies make it so easy to obtain a credit card that you get carried away. Before you know it, you have accumulated a multitude of cards

One of the most significant ways to get into debt is by applying for and owning many different credit cards. Often, this is because the stores and credit card companies make it so easy to obtain a credit card that you get carried away. Before you know it, you have accumulated a multitude of cards with very high interest rates that will take years to pay off. In many cases, stores offer discounts on purchases if you apply for, and receive, a credit card. Do not fall prey to this. Each time you acquire a store credit card, even if it is a soft credit check, it will still appear on your credit report and change the dynamics of your score.

Making minimum monthly payments is one way to dig the hole even deeper because you are basically paying the interest charges, and the principal continues to rise. Consolidating credit cards into one loan can be a way out. Search diligently for a loan, or a low interest credit card, on which you can combine all of your cards. Merging high interest debt into a single payment can be an enormous financial relief. The stress of trying to make minimum payments while the balance continues to increase can cause many sleepless nights.

When you have combined all credit card debt into one loan, you have an established amount to pay each month and a prearranged time period for repayment. This strategy will only be beneficial if you do not continue to use credit cards in the same manner you have been doing. Consolidating the cards and then continuing to use them, or procuring new cards, will begin the process all over again.

If you are struggling with debt and perhaps paying late, or not at all during some months, it may be difficult to find a consolidation loan with the lower interest rate you are seeking. Some of the areas for consideration are:

Current Credit Score

Check your score with the three reporting agencies – Experian, Equifax and TransUnion. If your credit is not good enough to qualify for a loan, do not apply. Your credit score may be negatively impacted by the application itself.

Applying for the Loan

Applying for a loan through traditional means generally requires a hard credit inquiry, and that may impact your credit standing. If poor credit is an issue, try less conventional ways of trying to acquire a loan, such as through private investors, borrowing from friends and family, or borrowing from your retirement account. Submitting applications for several different loans is a red flag because it suggests that you are not credit worthy.

Repaying the Loan

Once you have secured the funds to consolidate your credit cards, be extremely careful that you make payments on time; otherwise, your credit score will suffer. Paying on time can help repair damaged credit and put you on a better footing, which may signal better interest rates.

Transferring Balances

Once you have moved the balances from credit cards to the newly consolidated loan, destroy the old cards, but do not close the accounts. This creates another ding on your credit report, but keeping zero balances may help improve your score.

Is a Consolidation Loan the Right Choice

Regardless of how you got into this difficulty, a consolidation loan can be the answer to your problem. Budgeting is the key to acquiring and maintaining good credit. You become more deliberate about spending habits, and the by-product is improved credit. As you see your credit improve, you may be less likely to fall into this kind of credit conundrum again. If you do not create, and follow, a sensible budget, you will end up in the same situation again.

Impulsive buying is a major culprit. In addition, many people fail to make adjustments to their budget when their situations change. When there is more outgo than income, it should be a clue that you are overspending. Using credit cards to maintain a certain lifestyle is dangerous.

If credit card debt is the only kind of debt you have, a consolidation loan may help diversify the types of credit you have and may improve your score slightly. You especially want to avoid multiple inquiries into your credit if you plan to make a significant purchase, such as a house or car.

Think carefully about a debt consolidation loan and the period of time it will take to repay it. Even though you may find a good loan with low interest rates, which makes monthly payments more manageable, that is still a lot of outstanding debt for a long period of time. This may also affect your ability to make large purchases. Paying off the loan over a shorter time can help you prepare for a major purchase.

Consider a balance transfer credit card if you can pay off the debt in the prescribed period of time. Otherwise, you are right back where you started. That introductory rate period may ruin your carefully laid plans to get out of debt. If you have not paid the loan in its entirety when the introductory rate is over, you will be charged a much higher interest rate.

If you do not want to make your finances worse, be astute enough to carefully read the fine print in any balance transfer or other debt consolidation loan. The best way to get out of debt is to change your spending habits and to gradually, with patience, work your way out of a bad financial situation. If you can maintain a budget and pay your bills on time, your financial difficulty will improve over time. It probably took a shorter period of time to accumulate the debt associated with your credit cards than it will take to pay it off. Paying down the debt and starting on a path to good consumerism will ultimately give you the peace and comfort of knowing that you have control over your spending and, perhaps, other areas of your life.

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