What You Need to Know About Credit Card Debt Consolidation

If you have balances on more than one credit card, it can be stressful to juggle all the payments. One way to reduce the burden--and hopefully even save money--is to consolidate your debts on a personal loan or on a balance transfer card. Let's take a look at the options.

Consolidating debt with a personal loan

Sometimes, you can get a really good rate with a personal loan. If your credit card interest rates are high, then consider consolidating the debt on one personal loan. At LendingTree, you can get a personal loan between $1,000 and $100,000. Currently, rates start as low as 6.70 percent. Not bad, right? Of course, you need very good credit to get the best rates.

With debt consolidation, you lose the stress of keeping track of multiple payments. And hopefully, you'll be able to get a lower interest rate and even save money as you pay off the debt. Before you make a decision, though, read the fine print so you know if there are any debt consolidation fees that might be charged.

A word of warning: There a lot of scam artists who claim that they can fix this for you. If they require upfront fees or ask you to make several payments in advance, watch out. Unfortunately, these online sites try to take advantage of those who are desperate for financial relief. Just be careful about applying for loans with an online lender and check the company out with your state's Attorney General office and with the Better Business Bureau.

Consolidating debt with a balance transfer card

In case you aren't familiar with how a balance transfer works, here's a brief summary. You apply for a credit card that offers a zero percent introductory offer on balance transfers. Right now, card issuers are offering between six and 21 months. No, that's not a typo! Some cards are offering zero percent interest for up to 21 months.

You'll need a balance transfer card with a high credit limit if you plan to transfer several balances onto that one card. (Also keep in mind that some banks might have a limit on the total amount you can transfer.) After you request the transfer, you need to confirm that the balances on your old credit cards are zero before you stop making all the separate payments.

Once the transfers are complete, you start making one payment on your new balance transfer card. This is a golden opportunity to pay off--or at least pay down--your credit card debt without paying interest. And make all of your payments on time or you could lose the zero percent rate and be charged the go-to rate (the purchase APR you'll be charged when the intro period ends) for the balance. Set up payment reminders or automatic payments so this doesn't happen to you!

Now, you do need very good credit to qualify for the best offers. But if you have balances on cards with very high rates, you still might come out ahead with a balance transfer card that still charges some interest. For example, let's say you have a balance on a card and the interest is 20 percent. If you can get a card with an intro offer of 10 percent, you might still save a lot of interest. So it's worth exploring even if you don't have excellent credit. Then, you can compare the cost of a personal loan versus a balance transfer card and see which option saves you the most money.

Almost all balance transfer credit cards have a transfer fee. This ranges from 3 percent to 5 percent for each transaction. So if you're transferring $5,000 from Card A and $2,000 from Card B, and there's a 3 percent transfer fee, here's the total fee you'd pay:

Card A: $5,000 x .03 = $150

Card B: $2,000 x .03 = $60

Total transfer fee = $150 + $60 = $210

When you run the numbers to see how much you'll save (or won't save!), don't forget to include the transfer fee because that will become part of the debt you have to pay back.

Bottom line

Whether you consolidate your debt with a personal loan or use a balance transfer credit card for debt consolidation, there's one simple rule you must follow: Do not make new purchases with your credit cards. You can not get out of debt if you keep adding to it. And even though a balance transfer card is waiving interest for a specific time period, new purchases are not interest free. Unless, of course, the terms include a zero percent intro rate on purchases, too.

But even if it does, do not add to your debt total. If you do, you will stay in debt longer and will be paying more interest in the long run. So take advantage of your debt consolidation. Don't add new debt to your balance and don't make any late payments. If you approach this opportunity with determination and discipline, you'll be on your way to a better credit history and a debt-free lifestyle.

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