Mistakes to Avoid When Consolidating Credit Card Debt

The average working American carries upward of $6,000 of debt on their cards. Meanwhile, the average U.S. household only makes around $5,500 every month, so it's understandable why many fail to pay off card balances. Fortunately, you can make card payments easier through strategies such as debt consolidation.

If executed properly, not only will you clear your debt, but you'll also improve your overall credit history. However, you need to be careful. Card consolidation is not a one-size-fits-all solution, and you have to understand that your dues won't magically disappear. You first have to assess whether consolidating your debt is really the best option for your situation.

Debt Consolidation Mistakes

1. Rushing the Process

Explore alternative personal loan and card options, check all the terms and conditions, go through every single page of your contract, and constantly reassess whether consolidation is the quickest path to financial freedom. Take your time.

2. Neglecting Monthly Payments

Transferring your card debt to a new consolidation loan account is simply the first step to debt relief. The only way you'll reap the benefits of this reduction strategy is if you commit to your monthly payments.

3. Not Monitoring Credit Score Movement

A CNBC report shares how a financial writer had her score drop by 100 points simply because she failed to check on her credit standing and notice that she was following the wrong debt reduction plan. Regularly check on your credit score.

4. Closing All Credit Card Accounts

It'd be best to keep your cards active. Canceling them would drastically drop your revolving credit limit and negate any positive effects a balance transfer has on your credit score. However, if closing your accounts would bring overwhelming satisfaction, by all means, close your old cards.

5. Failing to Change Spending Habits

Reassess your spending habits, avoid making unnecessary purchases, and start saving more money. Make sure you never have to consolidate your debt again.

Looking for other ways to pay off your card balance? We have multiple guides and resources to help modern debtors create the most efficient debt management plan. Reach out to the Any Credit team for assistance!

Frequently Asked Questions

Is Consolidating Cards Bad for Your Credit?

The process of applying for a new loan or card is generally bad for your credit score. To maximize your new account, get an excellent repayment term that's easy to pay off and has lower loan interest rates. A new account might drag down your standing a bit, but you can expect your score to spike again after a few months of payment.

How Much Debt From My Credit Card Can I Consolidate?

For a balance transfer credit, you can easily consolidate up to $5,000 of debt if your credit score exceeds 740. Meanwhile, a debt consolidation loan allows you to transfer up to $10,000 if you have a credit score of at least 670. If you have poor scores, however, consider debt management programs. There are bad credit lenders that allow debtors to transfer up to $100,000 worth of debt.

What is The Fastest Way to Pay Off Credit Card Debt?

There are several ways to clear your balance without doing a card balance transfer. First, you can follow the snowball method. The idea is to pay off your smallest amount first, then gradually work toward larger accounts with higher interest rates.

Second, you can try debt settlement. These agreements are ideal for people who have no means to pay off their total loan amount (e.g., personal loans, credit cards, mortgage). Negotiate with your lender. Hopefully, they'll agree to an amount that's generally less than what you owe.

Do You Lose Your Credit Cards After Debt Consolidation?

These card accounts don't automatically close after consolidation. Debtors have the choice of keeping or closing their cards. As mentioned above, you'd generally want to keep them active to avoid hurting your DTI or debt-to-income ratio. A better strategy would be to use only a small percentage of each card's limit.

Is It Worth It To Consolidate Credit Card Debt?

Unfortunately, there are cases where applying for a debt consolidation loan would do more harm than good. You need to consider multiple factors, including:

  • DTI ratio: Reconsider consolidation if transferring your balance into a single account would spike your DTI ratio. Keep your DTI ratio below 43%.
  • Monthly Income: The monthly payment on your new card should only eat up a meager portion of your income.
  • Credit Standing: Only those with good credit standing can qualify for a debt consolidation loan. Bad-credit clients would have to look for providers willing to take the risk of lending money to a delinquent payer.

Don't limit yourself to just one or two debt consolidation loans. There are plenty of personal loans on the market. The best approach is to go through all the different plans, compare the repayment terms offered, calculate the monthly payments, then see how the new terms stack against your current card plans.

Be wary of cookie-cutter plans. Getting a debt consolidation loan won't work for everyone—especially those with a poor DTI ratio, bad credit, and low income. With that in mind, don't shy from debt settlement alternatives. Overall, the goal is to clear your debt. It doesn't matter whether you do so by consolidating your loans or appealing for a reduced settlement agreement.

Looking for more ways to improve your credit standing? Any Credit has multiple resources on how to get out of debt fast and improve your overall financial health. Visit the Any Credit website now to learn more!

Here at AnyCredit, we aim to make the most complex financial issues and topics easy to understand. In our articles, we will be making analysis, smart finance judgments, and honest conversations to help you make sense of your financial capacities and options.
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