Debt consolidation loans and paying off credit cards each have their own set of pros and cons. Here’s a quick rundown of each option to help you decide which is right for you.
What is debt consolidation?
Debt consolidation is the process of merging multiple debts into a single debt. Instead of making separate payments to multiple credit card issuers or lenders each month, you roll them into one payment from a single lender, ideally at a lower interest rate.
You can use debt consolidation to merge several types of debt, including:
- Auto loans
- Credit cards
- Medical debt
- Payday loans
- Personal loans
- Student loans
While debt consolidation won’t wipe out your balance, the strategy can make it easier and less expensive to pay off debt. If you get a low interest rate, you could save hundreds or even thousands of dollars in interest. Managing one payment can also make it easier to stay on top of your bills and avoid late payments, which can hurt your credit.
How does debt consolidation work?
Although there are many ways to consolidate debt, it generally works the same way: You pay off one or more debts using a new debt. Some popular debt consolidation methods include personal loans and balance transfer credit cards.
Depending on your unique situation — how much debt you have to consolidate, your credit score, how soon you need the funds, what type of debt you have and other factors — one method may work better for you than another.
When should I choose debt consolidation?
If you’re struggling to make your monthly payments on time, consolidating your debt could help you get back on track. This is especially true if you can qualify for a lower interest rate than what you’re currently paying. Just be sure to do the math to make sure that you’ll actually save money by consolidating your debt.
Debt Consolidation Loan Pros:
Debt consolidation is often the best way for people to get out of debt. Here are some of the main benefits that may apply.
– One monthly payment instead of several
– Potentially lower interest rate
– Can improve your credit score
Debt Consolidation Loan Cons:
– Requires good credit to qualify
– You may still owe the same amount of money
– Can be difficult to obtain
How to choose debt consolidation loan
If you’re interested in consolidating your debt, you’ll want to find the best loan for your needs. Here are a few things to keep in mind when shopping around for a consolidation loan:
– Interest rate
– Loan terms
– Fees
How can I consolidate credit card debt?
Credit card consolidation is a way to combine credit card accounts into a single monthly payment. Consolidating debt is the best way to reduce your interest rates when transferring debt from one credit or debit card to another. Using these strategies may lower interest costs and reduce payment complexity as well as shorter pay periods. How can you get rid of your credit cards debt:
- Get a personal loan
- Make some cash on a house
- Think about saving a 401K
- Set up debt management plans today
- Get professional help
These are methods you can use to consolidate your credit card debt, each with its own set of pros and cons. It’s important to compare your options and choose the one that’s best for you.
What are Paying Off Credit Cards?
Paying off credit cards is exactly what it sounds like – you make payments to your creditors until the balance owed is $0. This method can be effective if you have a plan to pay off your debts within a certain time frame, such as 5 years. Keep in mind that if you only make minimum payments, it could take much longer.
When should I choose to pay off my credit card?
If you’re able to make more than the minimum payment each month, paying off your credit cards could be a good option. This is especially true if you have high-interest credit card debt that you want to get rid of as quickly as possible.
Paying Off Credit Cards Pros:
– No interest charges if you pay off your balance in full each month
– Can help you build good credit
– Rewards programs can give you cash back or other benefits
Paying Off Credit Cards Cons:
– Requires discipline to not rack up new debt
– Multiple payments can be difficult to keep track of
– Can have a negative impact on your credit score if you carry a balance from month to month
Best Paying Off Credit Cards
U.S. Bank Visa® Platinum Card
Best for 0% APR
The U.S. Bank Visa® Platinum Card offers a 0% APR on purchases and balance transfers for the first 20 billing cycles (then, 14.49% – 24.49% Variable APR). There is no annual fee or foreign transaction fee. You’ll also earn rewards points on every purchase.
Chase Freedom®
Best for Cash Back
The Chase Freedom® card offers 5% cash back on up to $1,500 in combined purchases in bonus categories each quarter you activate. You’ll also earn a $150 bonus after you spend $500 on purchases in your first 3 months from account opening. There is no annual fee.
Capital One® Venture One® Rewards Credit Card
Best for Travel
The Capital One® Venture One® Rewards Credit Card offers 20,000 miles when you spend $1,000 on purchases within the first 3 months. You’ll earn 1.25 miles per $1 spent on all other purchases. There is no annual fee and no foreign transaction fee.
Bank of America® Cash Rewards credit card
Best for Bank of America Customers
The Bank of America® Cash Rewards credit card offers 3% cash back in the category of your choice and 2% cash back at grocery stores and wholesale clubs (up to $2,500 in combined choice category/grocery store/wholesale club quarterly purchases) and 1% cash back on all other purchases. You’ll also get a $200 cash rewards bonus after you spend $1,000 on purchases in the first 90 days of account opening. There is no annual fee.
Citi® Double Cash Card
Best for Flat-Rate Cash Back
The Citi® Double Cash Card offers 2% cash back: 1% cash back on purchases, and 1% cash back when you pay your bill. There is no annual fee or foreign transaction fee.
How to choose Paying Off Credit Card?
When deciding between debt consolidation loans, compare these factors.
Annual percentage rates
The loan’s APR represents its true annual cost, as it includes all fees and interest charges. Rates vary based on your credit scores, income and debt-to-income ratio. Use APRs to compare multiple loans. Choose a low rate with monthly payments that fit your budget.
Origination fees
Some lenders charge origination fees to cover the cost of processing your loan. The one-time fee typically ranges from 1% to 10% of the loan amount and is either deducted from your loan proceeds or added to the loan balance. If the fee is deducted from your loan proceeds, you’ll need to request more than the sum of your debts in order to cover the fee and still have enough to pay your creditors.
FAQ
What is a balance transfer credit card?
A balance transfer is a type of credit card transaction in which debt is moved from one account to another. For those paying down high-interest debt, such a move can save serious money on interest charges if done strategically.
What is balance transfer fee?
A balance transfer fee is a charge assessed by the credit card issuer when you move debt from one card to another. The fee is typically a percentage of the total amount transferred, and it can range from 3 to 5 percent. Some issuers may also charge a flat fee instead of or in addition to a percentage-based fee.
How long does a balance transfer take?
The length of time it takes to complete a balance transfer depends on the issuer and how you initiate the transfer. If you do it by phone, it could take a few days for the transaction to go through. If you do it online, it could take just a few minutes.
What Are the Risks of Debt Consolidation?
Consolidating debt could potentially lead to you paying more in the long run. A minor hit to your credit could be considered a risk if you were in the process of taking out a loan for something else, like a car or other item. It is important to make sure that the consolidation process saves you money, and that upfront costs by debt consolidation services do not affect your ability to make timely payments.
How Long Does Debt Consolidation Stay on Your Credit Report?
The amount of time debt consolidation remains on your credit report is determined by the type of consolidation loan you take out.
What Is the Best Way to Consolidate and Pay Off Debt?
The best way to consolidate and pay off debt will depend on the amount needed to pay off, your ability to repay it, and your credit score. It may be worthwhile to discuss your options with a debt consolidation service if the amounts are large enough to warrant their fee. For smaller debt amounts, it could be advantageous to consolidate them on your own. However, like with all debts, the ability to make timely payments is the most important consideration.