If someone offered you the opportunity to make paying off your debts both easier and cheaper, you’d jump at the chance — right? Debt consolidation does sound like a no-brainer when you think of it like that. However, like any debt relief strategy, it has its pros and cons to consider. It’s up to you as the borrower to crunch the numbers and really understand what you’re undertaking before you go ahead.
Credit card consolidation can simplify the process of paying off debts by bundling them while reducing the amount you end up paying in interest and fees. However, success is not automatically guaranteed; it must be achieved through smart planning and decision-making.
Here are four keys to successful credit card consolidation.
Make Sure Your Budget Is Accurate
Although budgeting has a less-than-exciting reputation, it is the most important building block of financial decisions. The good news is that tech tools — like money management apps and budgeting software — make it easier than ever to track your spending, categorize your expenditures, monitor your income and optimize your personal finances.
Updating your budget will help you decide how to pay off debt and how much you can devote toward monthly payments on said debts, whichever strategy you pursue.
Compare Your Consolidation Options
When trying to find a debt consolidation, keep in mind the term is actually a catch-all encompassing a few different tactics, such as:
- Conducting a balance transfer from a high-interest card to a low-interest card.
- Getting a consolidation loan and using it to wipe out higher-interest debts.
- Refinancing your mortgage and using the difference in cash to pay off high-interest debts.
- Enrolling in a debt management program through a credit counselor.
The exact plan you choose may depend on factors like the amount of debt you’re carrying, your credit score and more.
Calculate Interest Charges & Fees
One commonality you’ll encounter among debt consolidation methods is the presence of fees and interest charges. For instance, debt consolidation loans carry an average interest rate around 18.5 percent, according to Value Penguin — although the exact amount will depend on the lender through which you apply and your credit worthiness, so you may qualify for a lower or higher annual percentage rate.
Balance transfer fees usually clock in around three to five percent of the amount of the balance, as well as offer low- or no APR for a set period of time during which it’s advantageous to pay off as much debt as possible.
The cost of one-time and recurring fees for debt management plans depend on the credit counseling agency and its location.
Since a major goal of consolidating is to save money, it’s important to compare the estimated interest charges and fees against how much you’re currently paying to service your debts. It’s generally only wise to consolidate if you’ll be reducing how much you owe, all things considered.
Avoid Accumulating New Debt
Debt consolidation can take months or years, during which time you’ll need to stop using credit. The temptation to buy on credit can grow as debt shrinks, but this will only set you back on your journey toward freedom from debt. While it’s generally wise to keep credit accounts open for the sake of your credit score, do whatever it takes to avoid actually making purchases on those accounts — like hiding the cards in a safe place or even freezing them.
It’s also important to avoid replacing the debt you’ve just consolidated through all that hard work with new debt. This requires practicing new habits and keeping up with your budget.
Successful credit card consolidation depends on choosing the best strategy, budgeting effectively, understanding the costs to consolidate and avoiding new debt in the meantime.