Here’s How To Consolidate Your Credit Card Debt

Personal Finance Notes

“How do I consolidate credit card debt?”

It’s one of the most popular personal finance questions on Google.

Here’s what you need to know to pay off your credit card debt faster.

Credit Card Consolidation: Pay Off Credit Card Debt

Americans owe $1 trillion of credit card debt.

When it comes to credit card debt, one of the most effective strategies is to consolidate your credit card debt.

You can consolidate your credit card debt with a personal loan, which is also known as a credit card consolidation loan. With a personal loan, you can consolidate your existing credit card debt into an unsecured personal loan that is typically repayable in 2 to 7 years. Personal loans range from $1,000-$100,000 depending on the lender.Today In: Money

Why would I consolidate my credit card debt?

There are several reasons to consolidate credit card debt.

First, the interest rate on your credit card can be higher than the sum of the interest rates on your student loans, mortgage and auto loan. Think about that for a second: if you are carrying credit card debt, the interest rate on your credit card can be more expensive than all your other types of consumer debt.

Second, credit card debt is considered variable interest debt, which means the interest rate can change. For example, if the Federal Reserve raises interest rates, the interest rate on your credit card debt can increase. That means you may pay more money each month to repay your credit card debt. In contrast, a personal loan is a fixed interest loan, so you pay the same, fixed amount each month regardless of changes in interest rates, which is more predictable.

Third, a personal loan offers flexible repayment terms. If you plan to repay your credit card debt within 2 to 7 years and can receive a lower interest rate than your current credit card interest rate, a personal loan is a smart strategy to save interest costs.

How does credit card consolidation work?

You can apply online for a personal loan, and can start by comparing lenders and interest rates. Today, interest rates start as low as 5.74%. Lenders will evaluate your financial and credit profile, including your credit score and income, to determine your interest rate. If you receive an interest lower than the interest rate on your credit card debt, it may be financially advantageous for you to consolidate your credit card debt. Also, your personal loan can be funded within days, so the process is relatively quick.

How much money can I save with credit card consolidation?

Here’s how to think about how much you can save consolidating your credit card debt.

For example, let’s assume that you have $10,000 of credit card debt at a 19% interest rate and make a $250 monthly payment. With a strong credit profile, if you can consolidate your credit card debt with a personal loan at a 7% interest rate and three-year repayment term, you will save $4,634 and pay off your credit card debt earlier. While your interest rate may be different, your goal is to receive an interest rate lower than your current interest rate. So, in this example, an interest rate lower than 19% would make a personal loan a potentially smart move.

You can use this credit card payoff calculator to calculate how much you can save when you consolidate credit card debt.

Original article seen on Forbes (Zack Friedman)