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Credit Card Debt Consolidation Loans – Myth vs. Reality


Epic Loans Editorial Team

Credit card debt consolidation - Myth vs Reality

Credit card, if used judiciously, is a handy tool to get that extra cash in case of emergency. However, situations such as sudden loss of job or medical requirements can put you in unexpected debt.

Statistics show that 73% of Americans have a credit card by age 25. By the end of 2022, there were over 518 million credit card accounts across the US. However, only 50% of credit card owners are confident they can pay off the debt.

About 47% of credit card holders in the US are not even aware of the interest rate, which currently stands at 24.45%.

When it comes to managing debt through consolidation, people may have several myths that hold them back. This article explains the myths and realities around credit card debt consolidation loans.

Myths About Credit Card Debt Consolidation Loans

Distinguishing myths from reality is the first step towards managing credit card debt, avoiding costly mistakes, and protecting your credit score. Here are some of the myths to debunk and consolidate the debt –

Will credit card debt consolidation hurt your credit score?

Yes, it is true! But not really. When you apply for a personal loan to consolidate the debt from multiple credit cards, the bank will run a hard inquiry on your credit score. This means they will pull out every transaction you have done on credit, the loans you have held, and your current income.

This hard inquiry may temporarily push your credit score down.

However, consolidating the debt and paying it faster will increase it much higher in the long term. By consolidating several high-interest loans on credit cards under one low-interest personal loan, you make repayment easy and manageable.

Read More: Does Credit Card Consolidation Hurt your Credit Score?

Closing unused credit card account will boost your credit score

By closing unused credit cards, you may lower your chances of overspending, but it will not boost your credit score. Rather, it may lower it. When you close the other cards, it may increase your credit utilization ratio, which is the amount you use vs. the total amount you are eligible for.

You lower the total eligibility without lowering the usage, which can result in higher credit utilization and a possible adverse effect on your credit score. Rather than closing other unused credit cards, you may want to focus on closing the one under debt.

Approaching your credit limit is harmless

The closer you get to the credit limit, the lower your credit utilization ratio will be. You should ideally keep this ratio under 30%. For example, if you have a $1,000 credit limit, you must not go above $300 of your credit card balance at any given time.

By using a spend management system, be it with an app or manually, you keep a check on credit card expenses and prevent them from crawling above the 30% barrier.

Carrying a credit balance improves the credit score

Credit card balance is the sum of all outstanding balances on the accounts you hold. If you leave them fully or partially unpaid at the end of the billing cycle, you are essentially carrying them over to the next.

Doing so will put a cumulative interest on the outstanding balance. It will make repayments increasingly difficult and will lower your credit score significantly.

Opening a new credit card will lower your credit score

The hard inquiry that comes with a new credit card application may temporarily lower your credit score. However, this may increase your credit utilization ratio. If you keep paying your bills on time and keep the utilization below 30%, it will increase your credit score.

Similarly, opening new credit card accounts just to use sign-up bonuses or reward points can lower your credit score.

Checking your credit lowers your credit score

When a bank runs a hard check on your credit card, it lowers your score temporarily. But checking your own score does not have any impact. In fact, checking it once or twice a year may help you achieve better financial discipline.

Credit Card Debt Consolidation Loans – Myth vs. Reality

Reality about credit card debt consolidation loans

Proactively consolidate the credit card debt before you struggle to handle it. The longer you procrastinate, the greater the chances of debt management, filing bankruptcy, and settlement, all of which will plummet your credit score. Here are some of the realities of taking the debt consolidation route –

Interest rate changes

By taking a zero-interest rate balance transfer credit card, you can consolidate the debt easily and avoid paying any interest for a given time. Be sure to check the upfront charges for transferring the balance. It should be lower than the overall debt for the exercise to be prudent.

If the charges are higher than the overall debt, you can choose other consolidation options, such as a personal loan. Irrespective of the route you take, consolidation helps you manage debt and pay it easily with lower interest.

Read More: Using a Personal Loan to Pay off Credit Card Debt

Additional costs

Not every debt consolidation loan saves you money. Be sure to check for a range of other charges, such as debt transfer fees, annual fees, debt closing costs, and origination fees. Research well, and choose an institution that helps you consolidate the debt with the lowest charges.

Read More: Best Ways to Consolidate Credit Card Debt

Fiscal responsibility

Debt consolidation can get out of control if you continue to spend beyond your means on the credit card. It is important to stop spending on the credit card till the time you close the debt consolidation loan. Once the loan is closed, keep a tab on the spending habits and define a monthly budget.

Conclusion

Even the best money managers and budget planners can stumble. One unexpected life incident, and you could find your credit cards max out. Remember that it is not your fault, and there are ways to overcome this situation with good planning and debt consolidation.

EPIC Loans helps you consolidate your credit card debt through several means, including personal loans.

Frequently Asked Questions:

Is a credit card debt consolidation loan bad for your credit?

There will be an initial dip in your credit score due to the hard check the bank runs. However, consolidating debt will be good for your credit score in the long term.

Is a credit card debt consolidation loan expensive?

Yes and no! It depends on how much the upfront processing and balance transfer fees are. Be sure to check that the fixed fee of the bank is not higher than the total debt interest you currently owe.

Is credit card debt consolidation loan a scam?

Debt consolidation is a legitimate way of managing and paying off debt at lower interest rates. However, you must be careful of debt settlement agencies that might put you in greater trouble. Beware if –
1. They ask you for an upfront fee for debt settlement
2. The agency forces you to act fast
3. They advise you to stop paying credit card bills
4. You get a guarantee on debt settlement or reduction
5. They do not disclose their terms of service
6. The company claims to have a special government program for debt settlement