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5 common ways to consolidate credit card debt

Credit cards are among the top four debt items in the country; where the other three include mortgage loan, auto loan, and student loan. Credit card plays a vital role in most people’s lives, especially in this consumer-driven economy. While credit cards play an essential role, they do provide the purchasing power to the customer that can enable them to make an otherwise impossible purchase.

A credit card debt occurs when the user incurs revolving credit loans.

5 common ways to consolidate credit card debt

The reason behind this is often due to financial negligence as not every credit card user understands how late credit card charges work and other important details related to credit card.

Provisions that allow people to resolve their credit card often include consolidation of credit card debt as it is one of the most reliable methods for the same. Before understanding more about consolidating credit card debt, let’s have a look at a few reasons that is experienced with a credit card debt.

Causes of credit card debts
People often own more than one credit card for multiple purposes. This further makes the credit card users buy more than they can pay, which is one of the primary reasons they fall in debt.

When this continues for long, the debt that has been accumulated over time shapes up to be bigger than the user’s income. This is how a credit card user can fall into huge debts.

Debts get complicated when the user experiences payment dispute where lenders report late payment or no-payment to the credit bureaus.

Functions of consolidating credit card debts
When a user is going through credit card debt from multiple cards, they can consolidate those debts into a new loan and pay that to clear all the debts. This is called debt consolidation and works well when handled right. In debt consolidation, the person in debt consolidates all their debts into one debt and take a loan to pay it off. This solves the confusion of multiple loans and different interest rates on them.

Different ways to consolidate credit card debt
There are many ways one can work toward consolidating credit card debt, but some popular ways include the following.

Nonprofit credit counseling organization
Non-profit debt consolidation companies help people get out of debt without having to take a loan. Here, the debt gets consolidated into the monthly payment. It is often suggested to people once they complete their credit counseling session.

These organizations work with the creditors to reduce interest rates, which collectively lowers the interest rate for the debtor. As debtors make monthly payments, it gets transferred to the creditors.

Credit counseling can be done online or on a call. Some features most nonprofit credit counseling organizations provide include the following.

Consolidation of all bills into one
Enables paying off of debts faster – debtors can expect to be free of debts in 3-5 years depending on the size of their debts
Lowering of interest rate free of credit score
Stops call by creditors for collection
Elimination of late fees and over-limit charges
Make a realistic budget and financial plan for the debtor

Personal loan
Another way to consolidate your credit card debt is through an unsecured personal loan. One can take this loan from a local bank, credit union, or an online lender. Visiting a local credit union first can help one get offers like flexible loan terms and lower interest rates. This can be beneficial for those who have bad credit. Coming to the annual percentage rate, one can expect a maximum of 18% by a federal credit union.

A debt consolidation loan can also be a wise decision when it comes to personal loan. One can get this loan from a reliable online lender and ensure that their credit score does not get impacted. People with good credit score get a lowered rate while borrowing a debt consolidation loan.

Balance transfer credit card
Most balance transfer credit cards come with a 0% interest rate on balances while one consolidates their credit card debt. In balance transfer, the debtor transfers high-interest debt from one or multiple credit cards to one balance transfer credit card with a lower interest rate. A balance transfer credit card allows the debtor to apply most of their payments to the principal balance every month instead of charging interest on the balance. This helps people to eliminate their debts faster.

Some popular balance transfer credit cards for 2019 are mentioned below.

Wells Fargo Platinum Visa Card
U.S. Bank Visa® Platinum Card
Chase Freedom Unlimited®
Capital One® Quicksilver® Cash Rewards Credit Card
BankAmericard® credit card
Citi® Double Cash Card
Discover it® Balance Transfer

While a balance transfer credit card can be a great way to consolidate the credit card debt, it can come with certain drawbacks where the debtor might be charged with a balance transfer fee that is typically around 3% or $5 on the balance one transfers.

Another important factor to know about balance transfer credit card is that one can only transfer as much as their credit limit. This also indicates that one may not be able to accommodate all their debts. However, this option does allow people to pay off a major section of their debts.

Borrowing or withdrawing from a qualified retirement account (401k or IRA)
Most people have put aside some amount of their income for their retirement in a special retirement account. Popular retirement saving funds are 401(k) and IRA. In order to pay off a consolidated credit card debt, one can consider borrowing or withdrawing money from their retirement account.

This method is free of any kind of credit check, one may have to pay an early withdrawal penalty.

The benefit to using this option is a lowered interest rate and this loan is not counted on the person’s credit report.

Borrow from friends or family
This can be one of the last resorts when it comes to resolving the prolonged credit card debt situation. As this method prevents the credit score from getting affected as it’s an unofficial process there, one can expect a low-0% interest rate on the payments.

However, it is important to proceed with caution as it can create internal problems between friends or family.

Effects of debt consolidation on credit report
Consolidating credit card debt is a hassle-free way to resolve credit card debt, but it does have an impact on the credit report. Whenever there is a loan involved of any kind, especially for the purpose of debt consolidation, there is an in-depth inquiry into the credit. Every inquiry into the credit leads to a fall in the credit score.

Although a debt consolidation and settlement can impact the credit score, one can always work toward rebuilding their credit once the debt has been settled.

One can rebuild their credit report by first checking their report to know where they stand financially. Secondly, it is important to start planning, budgeting and maintaining your financial status. The next step involves making strict timely payments to small purchases. An important tip to remember is to avoid taking credit on anything and everything. Also, it is important to start saving up for rainy day fund, down payments, and so on. Make sure that you monitor the credit report regularly to maintain a positive credit score.

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