How does a credit card consolidation loan work… and is it the right option for you?

Interest on credit card debts can be relatively high, which can cause problems when trying to pay them off. Additionally, having too much credit card debt can negatively affect your credit score, which means you will have problems accessing credit.

One way to get your finances back on track in such circumstances is to consolidate your credit card debt into one monthly payment by taking out a credit consolidation loan. If this is a new concept, you might want to keep reading to understand how this option works and under what circumstances it would be the best option for you.

What is debt consolidation?

As the name suggests, debt consolidation consolidates all your debts into one. Often, debt consolidation is used by people with multiple credit card debts to consolidate debts from the pool into one debt for easier management.

Debt consolidation involves taking out a personal loan and using the funds to pay off your credit card debt, leaving you with just one debt to pay off. Credit card loans have variable APRs of up to 16%, making them relatively unpredictable and expensive.

Getting a personal loan eliminates the unpredictability since the APR is fixed with rates as low as 4% if you have a good credit rating resulting in significant savings.

Circumstances where the debt consolidation loan is a good idea

You have a relatively good credit rating

Your credit score determines the amount of credit you can access and the rates the lender will charge your loans. Most lenders consider 670 to be a fair credit score, which means you can access credit at a relatively low rate.

Anything less than 670 would mean your interest rates will be significantly high, and taking out a loan to consolidate your debt might not make much of a difference.

You have high interest debt

Most personal loans have an average interest rate of 9.41%. On the other hand, credit card interest rates hover around 16%.

Consolidating your debts can be a good idea if you can qualify for a loan with a lower rate than your credit card lending rate.

You have a repayment plan

most significant credit card danger debt is that it has no payment plan. You can borrow and repay the loan on an ongoing basis, which means you can live with the debt for life.

Conversely, a personal loan has a repayment plan and would work best for someone with a debt reduction plan.

Finding the Best Credit Card Consolidation Loan Options

Taking out a loan to pay off your debt does not mean that you are debt free. It only means that all your loans are consolidated into one for easier management. If you’re not careful when choosing a lender, you could end up paying more when consolidating a loan.

Before choosing a lender for a credit card consolidation loan debts, you’ll want to consider their interest rates and other fees, such as application and origination fees. You can also identify any hidden charges and opt for the option that suits you best.

When consolidation may not be an option

Although consolidating your debt is a good thing, there are times when it may not work best for you. For example, if you have bad spending habits. In such circumstances, you may need to work on your drinking habits first.

Also, a credit consolidation loan wouldn’t make much sense if you have bad credit, because your rates for the debt consolidation loan may be higher than your credit card rates, you would so better find a way to clear the debt as is.

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