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Financial Planning

Best ways to consolidate credit card debts

Date:
October 25, 2021

Consolidating card debts can feel daunting. It's a new kind of debt you may not have accessed before, so let's look at where to begin and how to measure the benefits.

What are the best ways to consolidate debt?

There are several debt consolidation options. Not all of them are for everybody, but none of them require excellent credit. Balance transfers and debt consolidation loans are the most common, but let's look at several, one by one.

  1. Balance transfer credit card- If you have good credit, there's a good chance that you can transfer the balances of several credit cards to a new balance transfer credit card at a lower interest rate, often with a 0% APR for an introductory period. If you qualify, a credit card balance transfer can be a quick solution offering immediate relief. 
  2. Credit card debt consolidation loans/ personal loans- A debt consolidation loan is a type of personal loan available from banks, credit unions and online lenders. With this solution, you'll take the loan's lump sum and use it pay off your cards. Then, instead of managing always-shifting credit card payments on every month, you'll only have the loan's monthly payment - at an annual percentage rate (or APR) lower than you're paying on your cards. The loan's lower APR is the real cost-saver here. If you can't find a consolidation loan with a lower APR than your credit cards, then think twice about this approach. 
  3. Home equity loan- If you own a home and have enough equity to qualify, you can use a home equity loan or a home equity line of credit (also known as a HELOC) to pay off your credit cards or other debts. Talk to your mortgage provider and compare their terms with other financial institutions. Like personal or consolidation loans, simplified payments under a lower APR are big bonus here. 
  4. Debt management plan- If transfers and loans aren't available, or if you're just don't want a new loan, consider working with a credit counseling agency, who can set up a debt management plan. Credit counselors often negotiate a debt settlement on your behalf, then take payments from you to pay your creditors. However, unscrupulous organizations abound in this field, aiming to profit off a deal with your creditors. Look for nonprofit credit counseling agencies and survey reviews from previous users.

What are the benefits of consolidating credit card debt? 

If you have a lot of debt you're trying to get rid of, debt consolidation can offer a clear way forward, with more agreeable repayment terms. No matter which method you choose, here are five benefits that apply across the board:

1. Streamlined payments 

Instead of tracking multiple due dates each month, consolidate your debts into a single monthly payment, with one monthly due date. This saves you time, and it simplifies budgeting. With the same monthly payment every month, it's easier to set aside enough funds.

2. Lower interest rates

Personal loans and debt consolidation loans are frequently available at lower APRs than most credit cards. By paying off your high-interest cards and shifting the debt to a loan with a lower fixed interest rate, your savings could be substantial, especially in the long term.

3. Improved credit score

A debt consolidation loan may lower your credit score. It's behavior that credit reporting agencies view as positive and responsible, often rewarding you with a score boost. If you make regular on-time payments over the loan term, you'll build a positive credit history, which can improve your score too. 

4. Fixed payments

A debt consolidation loan are easier to track and easier to stay on schedule, with regular fixed payments every month. Usually a debt consolidation loan offers a schedule that gives you a clear end to your debt pay offs, which can help focus your efforts and plot a clear path ahead.  

5. Lower payments

By consolidating debt, your monthly payment will lower, because you'll have more time to pay it off, over the loan's extended term. However, even with a low interest rate, you could end up paying more interest over the total life of the loan.

Is consolidating credit cards bad? 

Does consolidating debt ruin your credit? Getting a debt consolidation loan can help lower your monthly payments, but it can also trigger a temporary dip in your score. Always look for loans or balance transfer cards with low or zero origination fees and balance transfer fees. And before diving, make sure you can afford the loan's proposed repayments.

Here are three ways consolidating debt can affect your credit. Some are good, some are bad.

  • Hard inquiries on your credit: When you apply for a debt consolidation loan, the lender will perform a hard inquiry on your credit history. This usually takes down your credit score by around 10 points, and it usually stands for about a year after their credit check.
  • Change in credit utilization: Lowering your credit utilization ratio can be a good thing for your credit score. Credit utilization measures how much of your total credit limit you're actively using. If you pay off your cards with through consolidation, you'll make more card credit available, your credit utilization ratio will go down, and your credit score is likely to go up.
  • Average age of accounts may drop: Your credit score fluctuates depending on how long your credit cards and loans have been open. If you consolidate and pay off your cards, consider keeping them open with a zero balance. If might feel good to close old credit card accounts, but the average age of your accounts will go down, taking a toll on your FICO score.

When is it a good idea to consolidate credit card debt?  

Consolidation can be a wise financial decision, depending on your financial situation. Here are four financial scenarios where consolidation makes sense:

  • Your monthly debt payments exceed 50% of your gross income.
  • Your credit is still good enough to get a low-interest debt consolidation loan or a 0% balance transfer credit card. 
  • You have a stable cash flow to regularly pay off a new consolidation loan.
  • You'll be able to pay off a consolidation loan within 5 years.

How Bright can help

Bright can pay off your cards fast, using our new patented MoneyScience™, a system of 34 algorithms that finds the fastest, smartest way to get you debt-free. Bright's MoneyScience™ studies your finances, moves funds when it makes sense and makes card payments for you, always on time and always optimized to save you money on interest charges, automatically. 

Bright does not offer debt consolidation loans. But we offer two other solutions, Bright Credit Builder and Bright Balance Transfers. They’re smart alternatives, with competitive rates and built-in automation. 

Bright Credit Builder is an easy way to boost your credit score. Once you’re signed up, we’ll set up an interest-free, secured line of credit and use it to make automatic payments on your cards, building a positive payment history and lowering your credit utilization. Bright Credit Builder focuses on utilization and payment history because as they improve, your credit score goes up!

Bright Balance Transfer offers a low-interest line of credit designed to pay off card debt fast while saving you from high interest charges. Once approved, Bright uses the funds from your Bright Balance Transfer to pay off your high-interest cards, moving those debts to our balance transfer program with its lower APR. Over the months ahead, Bright automates your new repayments, too, so you pay less in interest and it’s hassle-free. Bright Balance Transfers offers credit lines of up to $10,000 at APRs starting from 9.95%, depending on your eligibility.

If you don't have it yet, download the Bright app from the App Store or GooglePlay. Connect your bank and your cards in a snap, set a few goals and let Bright get to work.

MoneyScience™ Team
Bright Money

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