One of the primary reasons why people choose to consolidate credit card debt is to reduce their interest payments and also reduce their overall monthly payments.
Just like a regular loan consolidation program, a credit card debt consolidation program can help to lower monthly payments to free up some cash in your budget each month.
What credit card consolidation can’t do is reduce your credit card balances.
The consolidation process will simply shift balances and may help you pay off your balances faster because more of your monthly payment will end up going towards the principal, instead of just for finance charges.
Given these facts, when is the best time to consolidate your credit card debt? Should you even consider consolidating this type of debt?
Here are four important things to consider before you consolidate credit card debt.
1. Review Interest Rates
If you’re paying excessively high interest on various credit cards, credit card debt consolidation could help you pay fewer interest charges until the balance is paid off in full.
For example, carrying two cards with 15% and 22% interest rates and consolidating these cards on to one card or one loan with a 12% interest will reduce your monthly interest payments.
Your balance won’t be incurring excess interest, so any payments you make will be going more towards the principal and helping to pay down your outstanding debt more quickly.
2. Transfer to a Zero Percent Interest Credit Card
If you are qualify for a credit card with a zero percent interest rate, consider consolidating as much of your balances on to this type of card and making larger payments to pay off those cards in full.
Transferring your balances to a zero percent interest rate card can help you pay off the balance faster because your entire payment will be going towards the principal.
Just remember that these types of offers are often temporary so if you don’t end up paying off the entire balance in full before the promotional period, you’ll start to earn interest on the balance again. Most zero percent deals last around 12 months, though some can be as long as 18 months.
3. Current Monthly Payments
Some people consolidate credit card debt by getting a home equity loan, home equity line of credit, or a personal loan of some sort. Before doing this, weigh a lot of things carefully. For starters, how much are you paying towards your credit cards each month? Calculate your total monthly payment, on average, and recalculate it based on a lower interest rate offered by another credit card company or lender. Here is a link to an online calculator on Bankrate.com.
If your monthly payment won’t go down by very much, it may not be worth opening up a new credit line and then transferring your balances.
Remember that opening a new credit line will affect your credit report and there may be a lag time between securing the new credit line and then transferring balances. Consider time and interest rates when you are thinking about consolidating your credit cards debt.
4. Your Level of Financial Discipline
Lastly, be honest with yourself about your ability to properly handle a new line of credit.
Don’t make the mistake of consolidating credit card debt using something like a home equity loan if you’re just going to run up your credit cards again. If that’s the case, you’re better off paying off your credit cards little by little, as opposed to having the extra mortgage debt plus additional credit card bills.