If you are unable to make multiple credit card payments due to increased interest payments, or if you simply want to change from a credit lifestyle to a savings lifestyle, it may be time to consolidate your credit card payments so that you can eliminate credit card debt. Debt consolidation means combining all of your balances into one bill, which can be a useful way to manage your debt.
Before you commit to a credit card consolidation solution, your first step is to understand your current credit. Once you know exactly where you stand with your credit card debt, you can find and choose a solution that meets your specific needs. As you move towards a zero balance, you can take steps to ensure that you maintain healthy credit habits in order to keep your balances low and your credit score high as your credit history matures.
Understanding your current credit debt situation
Ways to consolidate credit card debt:
Debt counseling services
DIY Debt Consolidation
Credit Card Balance Transfer
Debt consolidation loans
Establish and maintain healthy credit habits
1. Understand your current credit debt situation
The first step is to take an inventory of what you owe and how much you bring home in paychecks each month. Start tracking what you owe and what you earn to keep track of what you earn, what you spend, and what you have left each month.
Know your credit cards: what you owe, minimum payments and APR
Whether on paper or using a spreadsheet, gather your most recent credit card balance statements and documents:
the total amount owed on each card.
the current minimum monthly payment for each card, and
the annual percentage rate (APR) for each card.
Know your budget: track your income and bills
Next, collect your most recent pay stubs to get an idea of your typical monthly income (omitting any bonuses or tips you can’t rely on each month).
Now, in terms of debt, add a collection of your most recent monthly and annual bills to your credit card balance list. This may include the following:
Rent, mortgage and other housing expenses
Utilities, such as water, gas, heating and electricity, broken down by average monthly balance
Loans and insurance: auto loans and insurance, student debt payments and other personal loans or insurance costs
Subscription service payments (such as cable and cell phone bills)
Grocery and commuter bills
Education and child care expenses
and any other regular monthly payments, such as gym memberships and public transportation fees.
You can also load this information into an online budgeting tool, such as Chase’s Budget Builder, for future reference. There are also many free and easy-to-use budgeting apps available online.
Once you have all of these at your fingertips, you’ll have a clearer picture of your total expenses and income, as well as how much credit card debt adds to your monthly costs.
Know your balance: Can you meet your minimum payments?
Using your minimum credit card payment, add up your credit card bills each month. Is your total monthly bill greater than your monthly income, or does your income exceed your bill? Use your knowledge of the overall balance to choose the credit card debt consolidation solution that is right for your situation::
2. Ways to consolidate credit card debt
With your knowledge of your financial situation, you can begin to choose the debt consolidation strategy that is best for you.
Debt counseling services
You can also find many options through debt counseling services, which many people turn to when they find that their credit card debt exceeds their income. A debt counselor can help you choose the option that best fits your lifestyle and needs.
Advantages of debt counseling services:
Some debt counseling services offer free or low-fee services, depending on your income.
The goal of a debt counselor is to consolidate all of your credit card debt into one payment, making it more manageable and included in your budget.
Debt counseling services that are accredited by the National Foundation for Credit Counseling (NFCC) ensure that you get help that is fair, legal and reasonably priced.
A debt counselor can also help you avoid losing your home, car or other property to pay off your debt. Once you commit to a repayment plan, your debt counselor may help stop debt collection letters and phone calls.
Meeting the repayment terms set by your debt counselor may improve your credit score.
Disadvantages of debt counseling services:
You usually cannot open or apply for any new lines of credit or loans until you pay off your debts through an approved debt counseling consolidation plan.
Some debt counseling services recommend closing your credit cards after they are paid off in full. However, keeping your cards open (even if you don’t use them for charges) can actually help improve your credit score.
Some debt counseling services require a certain level of income, expenses and debt to qualify for assistance.
Service fees may be charged during the course of your credit card debt repayment plan, so be sure to ask what fees, penalties and charges will be applied to your account before you make any commitments.
DIY Debt Consolidation
For those who have enough income to support their credit card payments, there are several options for reducing the balance to zero.
The snowball method vs. the avalanche method
There are two suggested ways to tackle credit card debt on your own: the snowball method and the avalanche method. Both methods are easy to understand if you keep track of your credit card balance, minimum payments and APR:
The snowball method aims to pay off all credit card balances with the minimum monthly payment, but then suggests that you add any other available funds to pay off the credit card with the largest balance.
The avalanche method also recommends paying off all minimum monthly payments, but then instructs you to pay off your credit cards with the highest APR with additional funds.
Regardless of which method you use, when you have paid off the card with the largest balance or the card with the highest APR in full, you can keep the same monthly payment and direct it to the next credit card.
This strategic approach can help borrowers with multiple credit cards by first reducing the larger problem card (larger balance or higher interest rate) and then moving on to the next largest problem card: consolidating your debt as you go.
Advantages of DIY Debt Consolidation
Whether it’s the avalanche method or the snowball method, you can use budgeted funds to pay off your credit card debt.
DIY debt consolidation requires no additional commitment to a new line of credit or loan.
Self-managed debt repayment helps create a budgeting strategy for habitual savings that can be continued after credit card debt is paid off.
Paying your credit card debt on time, keeping your payoff account open, and reducing your balance and credit limit all help to improve your credit score.
Disadvantages of DIY Debt Consolidation
If your monthly income is inconsistent, it may be difficult to keep track of regular payments.
DIY debt consolidation is ideal for those who think they can afford the activity of paying off their debt while still charging interest rate fees on their existing balance. However, it may not work if you are already struggling to meet minimum payments or credit card balances.
DIY debt consolidation requires a strong commitment to paying off credit card balances, as well as the ability to consistently track and manage your budget and finances.
You will gain additional available credit, which can lead to overspending.
Credit Card Balance Transfers
Transferring your balance can reduce your current credit card interest payments, but any balance transfer should be done very carefully.
If you know the APR of your current credit card, it should be simple to identify a new credit card that offers (1) a lower APR and (2) the ability to transfer an existing balance. If you can get approved for a new credit card that meets both of these criteria, you will need to ask the card issuer about any fees associated with the balance transfer: sometimes the fees are based on the number of balances you transfer, while others may be based on the dollar amount of the balances you transfer. Find out what your particular balance transfer strategy will cost you before you commit to consolidating your debt through a balance transfer.
Introductory 0% APR credit cards are one of the most cost-effective ways to transfer your existing credit card balances because they do not charge any interest on your account until the introductory period is over. When transferring balances to such introductory 0% APR credit cards, your goal should be to pay off as much of your balance as possible before the end of the introductory period and not to charge any new fees on this new card – this will prevent you from adding interest charges to your new account.
Finally, avoid considering constantly transferring balances to avoid paying credit card debt. While your credit score may currently allow you to open new cards, the perpetual habit of opening new cards to transfer balances will certainly lower your credit score: it will not solve your credit problems. Think of balance transfers as a one-time window in which you will do everything possible to reduce your credit card balance before the introductory period expires and the interest rates begin.
Advantages of credit card balance transfers
A credit card balance transfer can reduce the amount of interest you owe each month by moving your current credit card debt from a high APR to a lower (or 0%) APR.
Once approved, the funds transfer is quick, allowing you to resolve credit card issues immediately.
Transferring balances from multiple cards to one card is an easy way to improve debt management.
Disadvantages of Credit Card Balance Transfers
When the introductory 0% APR expires, interest may be charged on your entire balance, often at a high rate.
Balance transfers usually require a balance transfer fee of 3-5% of the total amount you want to transfer.
Opening multiple credit cards for balance transfers can significantly reduce your credit
