If you have debt on several credit cards, you probably feel like you’re treading water in the ocean. For one thing, you’re stressed about making multiple payments on time. You might also be stressed about having enough money to even make the payments.
One option to get things under control — and save money — is to consolidate your debt. You’d be making one payment a month instead of four or five. And hopefully, you’ll even get a lower interest rate, which will save you money.
If that sounds like music to your ears, then read on to learn how to consolidate credit card debt and take back your financial life.
Using a Balance Transfer Credit Card
You’re going to need a good-to-excellent FICO score to qualify for the best balance transfer cards. Right now, the top balance transfer credit cards are offering zero percent annual percentage rates with introductory periods ranging from 12 to 21 months. If you do qualify, this is a golden opportunity to pay off your debt without paying interest.
As long as your credit limit is high enough to cover the amount you want to transfer, you’re in business. But there are two rules to remember or your golden opportunity can turn dark and ugly.
[Read: The Best Credit Cards Without Balance Transfer Fees.]
The first rule is that you must determine your monthly payment so you’ll pay off your debt before the intro period ends. If your new card has a balance transfer fee, which ranges from zero to 5 percent, you have to include that fee in the total amount you have to pay back.
For instance, if you’re transferring a total of $10,000 onto a card with an 18-month intro period and a 3 percent transfer fee, then you need to pay $572.22 every month to pay it off before the intro period ends ($10,300/18 = $572.22).
When the intro period ends, you’ll start paying interest at the “go-to rate” on your balance. So, do the math and make a commitment to pay off your debt within the allotted time frame.
The second rule is that you can’t use your balance transfer card for new purchases. Sometimes, your new balance transfer card will offer a zero percent intro rate on purchases as well. Don’t get seduced by that offer. You can use this card for new purchases when you’re debt-free.
Getting a Debt Consolidation Loan
If you don’t qualify for one of the top balance transfer credit cards, then consider consolidating your debt with a personal loan. Personal loans are becoming very popular. According to a TransUnion report, there are more than 18 million personal loans in the marketplace, which is a 40 percent increase in the past three years.
[Read: The Best Low-Interest Credit Cards of 2018.]
You won’t get a zero percent APR like you would with a balance transfer card, but you’d likely get a better rate than what you currently have on your credit cards. And best of all, you’d get a fixed rate. Since interest rates have been climbing this year, locking in a fixed rate is a good thing.
Check out rate comparison websites, such as LendingTree, where you can enter your information and get quotes from potential lenders. You can also check with your own bank and see if you can get a good rate with it.
Now, you do still need good credit for the best rates, but some online lenders are looking at factors other than your credit score. “We’re relying less on traditional credit scores and looking at other sources, such as cash flow data,” says Steve Allocca, president of LendingClub, an online marketplace connecting borrowers and investors.
Other than your credit score and other pertinent details, your debt-to-income ratio, or DTI, will be considered. Your DTI is the total of your monthly loan payments divided by your monthly gross income. LendingClub looks for a ratio no higher than 35 percent, but if you’re filing jointly, then the cap goes up to 40 percent, says Allocca.
Another major online lender, SoFi, also considers more than your score. “At SoFi, we consider a number of factors in looking at applicants, including free cash flow, employment, education and other details,” says Alison Norris, advice strategist at SoFi. “We also look at FICO 8 Scores in our underwriting process and require a minimum score of 680 for our personal loans. Our average borrower has a credit score of over 700.”
But even if you have a low credit score, go ahead and do the research to see if you can find a better deal than the one you have right now. “Those with the best credit scores typically qualify for the best rates on their new personal loans, but don’t let an average or even poor score keep you from requesting quotes,” says Norris. “This is especially true if you have more than $10,000 in credit card debt and those cards charge exorbitant interest rates, which most of them do.”
Even if you check out the possibilities and don’t get approved, you’ll know where you stand. If you feel trapped, then don’t hesitate to reach out to the National Foundation for Credit Counseling. You can talk to a counselor for free and discuss options to help you get out of debt.
[Read: The Best Credit Cards for Bad Credit of 2018.]
Planning for a Debt-Free Future
Here’s the most important thing to remember when you decide to consolidate credit card debt: Make monthly payments on time and don’t buy new things with your credit cards until you’re out of debt. Whether you use a personal loan or a balance transfer card, step away from the credit cards for now.
According to the 2018 Consumer Financial Literacy Survey conducted on behalf of the NFCC, 38 percent of U.S. adults carry credit card debt from month to month. This is up from 35 percent in 2016. Going forward, don’t carry a balance on your credit cards, or you will get right back into debt.
One reason people end up in debt is because they don’t have a rainy day fund. A 2017 survey by GoBankingRates showed that 57 percent of Americans have less than $1,000 in a savings account.
You’ll get into debt again if you aren’t financially prepared for emergencies. “It’s a perpetual trap when people use credit cards as a de facto emergency fund,” says Allocca.
Once you’re out of debt, take a look at how you got into that situation. Set up a budget and track your spending. And build a solid emergency fund. Then, the next time you need to buy a new refrigerator or deal with huge medical expenses, you’ll be prepared to handle it.
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How to Consolidate Credit Card Debt originally appeared on usnews.com
