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If you are burdened with high credit card debt balances spread out among a variety of different cards, pursuing credit card debt consolidation can make a lot of sense. For starters, the mere act of simplifying the number of payments from a larger number of different creditors down to as few as one creditor makes the monthly process of paying your credit card bills easier.
Not only that, but you’re also likely to save some money in the form of lower interest expense per month, which in turn will allow you to pay off more of your principal owed, thereby leading you out of debt in a shorter period. Finally, you may even be able to elevate your credit score through thoughtful credit card debt consolidation.
Get a Big Picture View of Your Credit Card Debt
Begin by listing all of your outstanding credit card balances, interest rates and minimum monthly payments. Get a sense of the total amount you owe, your combined monthly payments, as well as the amounts that are applied to interest expense and principal. You should also visit https://www.annualcreditreport.com to request a free credit report from any of the three national credit reporting bureaus (Experian, Equifax and TransUnion) and examine your report for any errors that may be negatively impacting your credit score. If you have good credit, you may qualify for a low (or zero percent) interest rate promotional credit card that you can use for transferring over and consolidating high-interest rate balances.
The benefits of low interest rate promotional balance transfers are fairly obvious – if you’re able to pay off a significant amount of debt within the promotional APR window (which can be as long as eighteen months), you can save hundreds, if not thousands of dollars in interest expense. However, you should expect balance transfer fees of between 2%-5%, and the promotional APR won’t likely apply to purchases – so be careful not to use the card for anything other than balance transfers. It follows that you should get completely clear about the length of the promotional APR period and carefully manage your behavior with the card accordingly.
Consolidate the Right Way to Raise Your Credit Score
Consolidating credit card debt while taking advantage of low promotional APR offers can also raise your credit score – if you do things the right way. For starters, approximately 30% of a FICO credit score is determined through the credit utilization rate, which is the percentage of available credit that is actually borrowed by a debtor. When you secure a new card with a promotional APR attached, your total amount of available credit rises.
Therefore, all other things being equal, your credit utilization rate will drop and your credit score can rise. Note that when an existing card of yours extends a promotional APR balance transfer offer, this does not raise your aggregate credit lines. Though either instance represents a favorable option from an interest expense savings standpoint, the former is more appealing from a credit utilization and credit score standpoint.
Therefore, if possible, pursue credit card debt consolidation through the use of a new card with a promotional APR. Additionally, when transferring from existing high interest rate credit cards, it is important not to close out any of those accounts. Keep your cards open and active, as closing them will lower your aggregate credit lines and raise your credit utilization rate, thereby lowering your credit score. Furthermore, since “account age” also accounts for as much as 15% of a credit score, keeping older accounts open (especially when the credit isn’t utilized) keeps the blended age higher and further boosts a credit score.
Examine Your Credit Card Behavior
Even if you are able to successfully consolidate your credit card debt and save money while raising your credit score, you should pause and take the opportunity to reflect on why you got into this situation in the first place. Remember, credit cards can be a very useful tool when utilized properly in the context of effective monthly budgeting, and they can help you build a healthy credit profile that can benefit you when you pursue significant additional debt in the future, such as a mortgage or auto loan.
However, credit cards should not be used for unnecessary extravagances or in a manner that builds gradually destructive spending habits. If you are saddled by high levels of burdensome credit card debt, recognize that you and you alone are responsible for any financial predicament that you currently find yourself in, and take steps to prevent the situation from worsening or repeating in the future. Write down and stick to a monthly budget that accounts for monthly cash inflows and necessary expenses – and keep your credit cards in reserve for emergencies and monthly budgetary flexibility only. In this way, you will develop the proper habits that can lead to the peace of mind that comes with a debt-free lifestyle.
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