3 Steps to Consolidating Credit Card Debt for the new year
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3 Steps to Consolidating Credit Card debt at the beginning of the year
Consolidation of debts combines several debts into one monthly payment that has an interest rate that is lower and could help you get rid of credit card debt in the coming year.
Written by lead writer Jackie Veling Pay later, buy now loans, debt consolidation, private loans Jackie Veling manages the personal loans for NerdWallet. Her work has appeared in The Associated Press, MarketWatch, MSN, Nasdaq.com and Yahoo Finance. Before her work, she had a writing and editing freelance business, where she partnered with a wide range of clients which included U.S. Bank and Under Armour. She graduated from Indiana University with a bachelor’s degree in journalism.
Jan 18 2023
Edited by Kim Lowe Lead Assigning Editor The consumer lending Kim Lowe leads the personal loans editorial team. She came to NerdWallet in the last 15 years, after managing content for MSN.com, including food, health, and travel. Kim began her career as a writer for magazines which covered mortgages as well as the restaurant, supermarket and mortgage industries. Kim obtained an undergraduate degree in journalism at 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 making resolutions, and by 2023 you could be determined to get control of your financial situation. Many of us will be cutting down on the high interest credit card debt.
Credit card balances were up 15 percent in the third quarter of 2022 when compared with the same period in 2021 — the highest increase in 20 years – according to the Federal Reserve’s most recent credit and debt report for households. Although delinquencies are still at historic lows are also increasing. In addition, due to increased rate of interest, carrying the balance is becoming more costly, which makes it easier to fall deeper into debt.
There’s a solution which can aid. Debt consolidation, a method that combines several loans into one monthly installment at a lower rate of interest is a life raft for those who cannot get out of debt by making minimum payments on their own.
Follow these three steps to consolidating credit card debt at the beginning of the new year.
1. Select the right consolidation tool to help your credit score and debts
Two of the most effective tools to consolidate credit card debt include a balance-transfer credit card or the debt consolidation loan. Both are based on rolling your debts into one single payment.
With a balance-transfer card, you transfer high-interest debts from your credit cards onto it. You then pay down the debt at a lower interest rate. Additionally, the majority of balance transfer cards have an initial 0% promotional period, generally lasting between 15 and 21 months. During this time, there is no interest to accrue and you’ll be able to be out of debt quicker.
Balance transfer cards can cost a transfer feeusually 3% to 5% of the total transferred amount. They can only be obtained by borrowers with excellent credit (690 credit score or better).
A is a personal loan that is available to borrowers across the credit spectrum, via banks, online lenders, as well as credit unions. When you take this loan in order to repay credit cards, you’ll be left with one monthly payment that’s guaranteed for the length of the loan generally between two and seven years. In addition, personal loans tend to lower interest rate than credit card, meaning you should still save money on interest.
Tiffany Grant, an accredited financial counselor based in Greensboro, North Carolina, states she doesn’t have any strongly favored choice over the other option, but encourages clients to consider credit scores.
“Because these products function similarly they function, it’s about what you’ll get accepted for.” Grant says. “Some customers aren’t eligible 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 aid in your decision-making as it can reveal the magnitude of your financial obligations. For instance, a balance transfer card is an ideal choice only if you have the right credit limit to cover the balance and repay it during the promotional period.
If the rate difference between the consolidation tool and your existing debt is small — consider a couple of percentage points — it could be better to forgo consolidation and avoid the damage in your score when applying for a new credit product according to Grant. In that case, consider other .
2. Make an application to a lender and get approved
After you’ve selected the consolidation tool you want to use It’s time to start applying.
Applications for balance-transfer cards and debt consolidation loans are usually available on the internet. They may require you to supply personal details such as you Social Security number, address and contact details, and details about your income and employment.
If you’re applying an interest-free debt consolidation loan it is possible that you will be eligible to pre-qualify, which lets you view potential loan conditions without affecting your credit score. If you’re not able to pre-qualify pay special attention to the criteria for qualification on the lender’s website, for example an acceptable credit score.
In evaluating the application, lenders look for a history of timely payment, low utilization ratio, and no credit inquiries, says Sarah DuBois, a spokesperson of Wells Fargo, which offers an account for balance transfers as well as a consolidation loan.
You can also take action to boost your chances of getting approved, says DuBois by paying off an outstanding balance, which will lower the amount of credit you use or disputing an error on your credit report.
Once approved, the following steps will differ based on the specific product. For instance, for an account with a balance transfer feature you will be able to begin the transfer of your existing debts online or over the calling your new issuer. The transfer could take up to a few days to a couple of weeks.
If you take out an consolidation loan, you may receive the funds into your bank account, which you can use to pay off any credit or debit cards. Other lenders can transfer the funds directly to your creditors.
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3. Make sure you pay your bills on time and develop a plan to get out of debt
Though consolidation can be an effective strategy however, it’s only effective only if you repay the debt you’ve taken on and avoid the temptation to build up an unpaid balance on your newly freed cards.
which prioritizes your 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 credit bureaus.
Also, think about how you can stay free of debt in the future. Grant says most of her clients aren’t in trouble because of poor spending habits but because they couldn’t cover unexpected expenseslike medical or car repairs.
Grant suggests building up one thousand dollars in emergency funds to prevent a cash shortage. Don’t wait until you’re debt-free to begin, she advises because unexpected expenses could pop up anytime, causing you to slip backwards.
Instead, save any cash you can manage into savings account that earns interest, while still making your new monthly payment.
“Maybe it’s going to take bit longer however, you’re able to do both, and in most cases this is the best option,” Grant says.
Author bio Jackie Veling covers personal loans for NerdWallet.
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