3 . Steps To Consolidating Your Credit Card Credit Card Debt at the beginning of the year
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3 Steps to Consolidating Credit Card debt for the new year
Debt consolidation combines multiple loans into one monthly payment at a lower interest rate and can help you eliminate credit card debt this year.
by Jackie Veling, Lead Writer Buy now, pay later loans, debt consolidation, loans for personal loans Jackie Veling manages the personal loans on behalf of NerdWallet. Her work has been highlighted in The Associated Press, MarketWatch, MSN, Nasdaq.com and Yahoo Finance. Prior to this, she was the manager of a freelance writing and editing business, where she partnered with a wide range of clients which included U.S. Bank and Under Armour. Her graduation from Indiana University with a bachelor’s degree in journalism.
Jan 18 2023
Editor: Kim Lowe Lead Assigning Editor Consumer loans Kim Lowe leads the personal loans editorial team. She was hired by NerdWallet following 15 years of in charge of content for MSN.com which included travel, health and food. She started her career as a writer for publications which covered mortgages as well as the restaurant, supermarket and mortgage industries. Kim received a bachelor’s degree in journalism from the University of Iowa and a Master of Business Administration from the University of Washington.
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The beginning of a new year is a good time for resolution-making, and in 2023 you might be particularly determined to get the control of your financial situation. Many of us will be cutting down on excessively high-interest debt on credit cards.
Credit card balances increased by 15 percent in the 3rd quarter of 2022 when compared with the same period in 2021 — the biggest increase in 20 years — according to the Federal Reserve’s most recent household credit report and debt. Delinquencies, though still at historic lows, are increasing. Due to the higher interest rates, carrying a debt is becoming more costly, which makes it easier to fall deeper into debt.
There’s a solution that could help. Debt consolidation, a method that combines several loans into one monthly installment with a lower interest rate could be a life raft for those who are unable to overcome debt making minimum payments on their own.
Follow these three steps to consolidating your credit card debt in the new year.
1. Find the right consolidator tool for your credit score and your debts
Two primary tools to consolidate credit card debt are the balance transfer credit card and a credit consolidation loan. Both are based on rolling your existing debts into one single payment.
When you use a balance-transfer credit card, you transfer high-interest debts from your credit cards onto it, and then pay off the balance at a lower rate. In addition, most balance-transfer cards offer a zero-interest promotional period typically lasting 15 to 21 months. In this period, there is no interest to accrue and you’ll be able to get out of debt even quicker.
Balance transfer cards can charge a transfer fee -usually 3% to 5percent of the amount transferred value. They are only accessible to those with excellent credit (690 credit score or more).
A is personal loan that is available to borrowers from all over the credit spectrum via banks, online lenders and credit unions. If you use this loan to pay off your credit card debts You’ll only have only one monthly payment fixed over the life of the loan, usually two to seven years. Personal loans typically lower interest prices than credit cards meaning you’ll still save on interest.
Tiffany Grant, an accredited financial counselor from Greensboro, North Carolina, states that she doesn’t have a strong preference between the two options, however she recommends that clients look at credit scores.
«Because they function in the same way, it’s more about what you’ll be granted,» Grant says. «Some people can’t get approved for a 0% interest rate card, and therefore have to do a low-percent individual loan.»
The ability to plug your balances as well as interest rates into a can also help you choose as it can reveal the magnitude of your financial obligations. For example, a balance transfer card is an ideal choice only if you qualify for the right credit limit to cover the balance and repay it during the promotional period.
If the difference in interest rates between the tools for consolidation and the debt you have tiny — say about a few percentage points — it could be better to forgo consolidation and avoid the harm on your credit rating by applying for a new credit product Grant suggests Grant. If that’s the case, you should consider other .
2. Apply with a lender and be approved
Once you’ve decided on your consolidation tool, it’s time to apply.
Balance transfer cards and debt consolidation loans can be found on the internet. They may require you to supply personal details such as your Social Security number, address and contact information, as well as income and employment information.
If you’re applying an interest-free debt consolidation loan You may be able to pre-qualify this allows you to view the potential loan terms without hurting your credit score. If you aren’t able to pre-qualify, pay special attention to the criteria for qualification on the lender’s site, including an acceptable credit score.
In evaluating your application, lenders examine your credit history for on-time payment, low credit-utilization ratio, and no credit inquiries, says Sarah DuBois, a spokesperson of Wells Fargo, which offers both a balance-transfer card and consolidation loan.
There are other steps you can take to boost your chances of approval DuBois says. DuBois, like making a payment on an outstanding balance, which reduces your credit utilization, or contesting an error that appears in your credit file.
After approval, the next steps will vary depending on the product. For example, if you have the balance transfer card you will be able to initiate the transfer of your existing debts either online or by calling your new issuer. The transfer can take between a couple of days to several weeks.
If you take out an consolidation loan you could receive the funds into your bank account that you could use to pay off your credit cards. Other lenders could transfer the money directly to creditors on your behalf.
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3. Keep up with payments and develop a plan to stay out of the cycle of
While consolidation can be a smart move but it’s only effective only if you repay the debt you’ve taken on and avoid the temptation to run up an unpaid balance on your newly freed cards.
that will prioritize your next monthly payment so you’re not charged a late fee. In the event of a late payment, it can affect your credit score if reported to the credit bureaus.
Also, think about how you can stay free of debt in the future. Grant states that most people she works with aren’t in trouble because of their poor spending habits, but rather because they were unable to pay for unexpected expenseslike medical bills or repairs to their cars.
Grant recommends building up to a $1,000 emergency fund to prevent a cash shortage. And don’t wait till you’re out of debt to begin, she suggests because unexpected expenses could occur at any time, and cause you to slip backwards.
Instead, set aside whatever cash you can manage into savings accounts that earn interest while still making your new monthly payment.
«Maybe it’s going to take more time however, you’re able to accomplish both and in most situations it’s best,» Grant says.
The author’s bio: Jackie Veling covers personal loans for NerdWallet.
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