Should You Consolidate Your Credit Card Debt?

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Most of us have a least one credit card to our name, and some of us have more than we’d like to admit.

But did you know that the average American has 2.69 credit cards? But, really, the number of credit cards you have shouldn’t concern you are as much as the amount of outstanding debt in your name.

Managing payments, balances and accruing interest can be overwhelming, especially if you have multiple portals to log into each month. Bad credit can affect your ability to rent an apartment, buy a car and even get a cell phone plan.

Related: How To Build Credit (For Complete Beginners)

The average millennial had $4,712 in credit card debt at the beginning of 2019, according to Experian. That’s a big number. For most millennials, that’s not the only monthly debt they are working to pay off. Most of us have student loans, car payments and house payments to worry about on top of our credit card bills.

In this article, we will go into the details on if you should consolidate your credit card debt.

Remember, we are not financial advisors, but we can provide resources to guide you in the right direction towards a financially stable future.

If you have completed all of these steps and are still struggling to pay off your cards each month, then it’s time to consider consolidation.

What Does Credit Card Debt Consolidation Mean?

Consolidating your credit card debt just means combining all of your debt into one monthly payment. Ideally, this one monthly payment will have a lower interest rate than all of your current credit cards.

It’s important to consider all of the factors and outcomes that go into consolidating your credit card debt. Consolidation should make your financials easier to manage and faster to pay off. 


Is Credit Card Debt Consolidation the Same as Debt Settlement?

Absolutely not. Consolidation and settlement might be used interchangeably, but they are not the same thing, and you need to be careful!

Debt settlement means you negotiate a lower outstanding balance with a lender and pay it off in full. Say you have $28,000 in credit card debt and work with he lender to reduce to amount due to $20,000. You would owe the full $20,000 to your credit card company and be settled up with them. 

If you don’t want to negotiate with lenders on your own, you can hire a debt settlement company. Be aware that working with a debt settlement company comes with a fee. Typically a debt settlement company will charge you a fee that ranges from 15-20% worth of your debt. In the scenario above, that means you could owe the financial company up to $4,000 for their services. Making your total debt owed $24,000.

Before you approach a debt settlement company, our advice is to take the time to figure out how you got into debt in the first place, scale back on the non-essentials and work towards a personalized debt consolidation plan.


Does Debt Consolidation Even Work?

Debt only consolidation works if you are willing to change your spending habits. 

Just because you move your debts from multiple places to one card does not mean it magically goes away or should be forgotten about.

It’s imperative you consciously change your spending habits to pay off your debt. That means you might have to give up your weekly pumpkin spice lattes, sushi lunches and happy hours you’ve become accustomed to over the years.

Like any financial plan, you need to commit and stick to it!

It can be tempting to continue to spend when you see a 50% off sale at your favorite retailer and a low balance on your go-to credit card, but you need to resist. Did we mention, consolidation only works if you stick with it until the end and pay off your debt completely? 

Can Consolidating Your Credit Card Debt Hurt Your Credit Score?

Consolidating your credit card debt does not impact your credit score.

What does affect your credit score is the amount of debt in your name. Consolidation does not decrease the amount of money you owe; it just moves it to one place. Consolidation can help you manage and understand the amount of debt you are in at any moment because it all lives within one account.

The best way to help improve your credit score is to pay off your debts.


Creating a Debt Consolidation Strategy

First, you need to understand how much outstanding debt you owe to know if you should consolidate. We will walk you through the questions you need to ask yourself and the steps that need to be taken before jumping into consolidation.

1. Review your Spending

We love tracking our spending through the Mint app. It breaks out your expenditures in a variety of categories like rent, bills, food and shopping so you can clearly see where your money is going every month. You must understand where your money is being spent every month before you consider any type of consolidation. I think you’ll be surprised how quickly those seemingly small $5-$10 purchases add up throughout the month.

2. Make a Budget (and Stick to it)

If there’s a way to adjust your monthly budget and give up some non-essentials, like fast food, mani/pedi’s, etc. to help you pay off your debt, try that first. There are probably more things than you realize that you can give up each month and apply that money towards your credit card debt.

3. Reach Out to Your Current Credit Card Companies

It never hurts to ask your current credit card companies if there’s any flexibility in your monthly payments. They might be able to lower the interest rate, monthly amount due or certain fees if you call them up and ask!


The 3 Best Ways to Consolidate Your Credit Card Debt

There are a few different ways you can safely consolidate your credit card debt and start moving towards a debt-free life. We want to provide you with multiple ways to consolidate so you can choose the best option for you and your needs.

1. Ask A Family Member For Help

This might be hard to swallow and definitely depends on how much debt you are in, but asking for some help isn’t always a bad thing!

We all make mistakes and borrowing money from a family member can be a heck of a lot easier than dealing with a lender, bank or credit card company.

That being said, this option does not allow you to get off scot-free. We strongly suggest you work out specific loan terms with your family members. And treat them with the same respect you would a financial institution that gave you a loan.

Also, if one of your family members does offer to help you with your debt, you better believe they will be keeping a close eye on your spending habits moving forward. Do you blame them? This is a great way to hold you accountable and get you on track to becoming debt-free.

2. Take Out a Person Loan

Applying for a personal loan is an easy way to consolidate your credit card debt.

Companies like The Lending Club make it super simple to get approved for a loan and offer a very low, fixed interest rate. The beautiful thing about this option is that it will not affect your credit score. Once approved for the personal loan, the money will be deposited into your checking account in about 4 days.

It’s imperative you use that money right away and pay off all of your outstanding credit card balances. Then DO NOT touch those credit cards. Your goal is to pay off this one loan and focus on one monthly payment.

Personal loans are great because they offer a very flexible payment plan, tend to offer lower interest rates and there are no prepayment penalties.

3. Transfer Your Balance to Another Credit Card

Transferring your outstanding balances to a new credit card is another option for consolidation.

There are plenty of credit cards out there that offer a 0% APR (Annual Percentage Rate) to transfer your balances.

Since your goal is to consolidate your debt, not rack up more debt, these credit cards aren’t as full of the perks that might have gotten you into this rabbit hole of debt. They are simply here to help you with your debt with a lower APR than your current credit cards and allow you to get a head start on paying it off.

The big draw here is that most of them give you over a year to pay off your transferred debt and new purchase debt before you have to worry about the interest rates. To put this into perspective, most credit cards have a 16-24% APR.

A few credit cards that will help with transferring balances that we recommend are Citi Simplicity Card, Quicksilver Capital One Card and the BankAmericard credit cards. All of these options do not charge an annual fee and will help you streamline getting out of debt.

3 Riskier Ways to Consolidate Your Credit Card Debt

If none of the options above will work for you, there are a few other ways you can consolidate your debt. We must warn you, these are riskier options, and we strongly suggest you go back and try to make one of the safer options work for you.

However, if you can’t, here are a few other risky but doable alternatives.

1. Borrow From Your Retirement Fund

Borrowing from your retirement is another option for paying off debt.

It’s important to know that not all retirement plans allow you to take out money to pay off debt, so make sure and check with your financial advisor regarding your specific plan. And, depending on your retirement plan, there will be a fee associated with any early withdrawals.

Be aware, this is a loan, and you will be required to pay yourself back with interest.

In most instances, the maximum amount you can take out is $50,000. We really hope you don’t have that much credit card debt, but if you do, be aware you will have to pay it all back within 5 years.

This might seem like an easy, low-cost option, but you need to realize you will also be missing out on whatever earnings your retirement plan was on track to make.

The upside to borrowing from your retirement is there’s no credit check, and the funding is quick since you are borrowing from yourself.

Just make sure you are prepared to pay yourself back. If you miss a payment, you could have to pay income tax on your withdrawal, which will not help your debt situation.

2. Home Equity Loans

Another option for homeowners is borrowing from a home equity loan. A home equity loan is essentially borrowing from yourself again, but from your home this time. They are easy to qualify for and tend to charge a low-interest rate.

But, this is A LOT riskier than other options in this article because if you do not make the monthly payments, you are at risk of foreclosure and losing your home.

If you decide to move and sell your home and still have an outstanding balance on your home equity loan, you will have to pay it off in full immediately. Also, if you have an outstanding home equity loan, you will be required to pay the closing costs on your home, which depending on the state, usually is handled by the new home purchaser, not the homeowner.

Related: The Definitive Guide to Mortgage Refinancing

3. Cash-Out Auto Refinance

Another option for consolidation is a cash-out auto refinance loan. Similar to your home equity loan, but with your automobile. You can get a loan for the value of your car to help pay off your debts, but again if you miss any loan payments, you are at risk of losing your vehicle.

Consolidating your credit card debt is a great idea, but what is more important is to live within your means.

I’d be lying if I said I wasn’t tempted to book that European adventure because “it’s a great deal” every time I get an email from Scott’s Cheap Flights, but you need to make sure you have the means to cover that trip.

My suggestion is to unsubscribe from all retail emails, so you are not tempted while you are trying to actively control your finances. Eliminate the temptation entirely. When I was working towards becoming debt-free, I even went as far as unfollowing retail accounts on Instagram, so I really wasn’t tempted.

Get a handle on your debt sooner rather than later; it will feel good to work towards becoming debt-free. Then you will be able to save up and enjoy those European vacations you’ve been planning in your head over the years.

Christine Devereaux Evangelista

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