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How Does a Credit Card Debt Consolidation Loan Work?


Epic Loans Editorial Team

How Does a Credit Card Debt Consolidation Loan Work

A credit card brings benefits like rewards, the opportunity to build credit, the ability to cover emergency expenses, and the financial freedom to make large purchases. But with the lucrative financial freedom, you have to use your credit cards responsibly to build credit or risk heavy debt. 73% of Americans get a credit card by the age of 25, making credit cards the most common first credit experience for young adults.

People fall into the debt trap as the total credit card debt in America has reached $1.031 trillion this year, with an average debt of $7,279 per user. As only 35% of cardholders pay their credit card balance in full each month, 65% are left to figure out how they can manage and pay off debt across multiple credit cards.

This is where credit card debt consolidation enters the picture. So, how can a new loan help clear your debt? To understand that, you need to understand how credit card debt consolidation loan works. In simple terms, debt consolidation allows you to combine multiple credit card debts into a single loan that is easier to manage in terms of monthly payments or interest rates.

Let’s delve deeper into credit card debt consolidation loans, what to look for when applying for one, and the pros and cons of debt consolidation.

How Does a Credit Card Debt Consolidation Loan Work?

When you opt for a credit card debt consolidation loan, you apply for a new loan to help you pay off your existing debts. As debt consolidation loans are fixed-rate installment loans, you need to make predictable payments every month, making it easier to manage your credit card debts.

For example, you have three credit card loans:

  • Card 1 with a $5,000 balance and a 20% interest rate
  • Card 2 with a $2,000 balance and a 25% interest rate
  • Card 3 with a $1,000 balance and a 16% interest rate

Trying to pay off these debts over a year will incur an additional $927 in interest costs. But opting for a credit card debt consolidation loan worth $8,000 with a 10% interest rate would bring down your interest costs to $440 over a year.

So, not only can you avail lower interest rates with a debt consolidation loan, but it also becomes easier to manage your monthly payments without having to worry about different interest rates, minimum payments, and monthly installments of different loans.

What to Look for in a Credit Card Debt Consolidation Loan

What to Look for in a Credit Card Debt Consolidation Loan?

Credit card debt consolidation loans can be a great way to refinance your debt while receiving favorable repayment terms. But to find the right debt consolidation for you, you need to evaluate its key features and whether they align with your debt repayment goals.

The key things you must look for in a credit card debt consolidation loan are:

Types of loan

The most common types of debt consolidation loans are:

  • Personal loan
  • 0% balance transfer credit card
  • 401(k) loan
  • Home equity loan

Some of these loans may require you to put down collateral, while others may not. Additionally, some may offer you a low introductory interest rate, allowing you to clear a large portion of debt before the interest rates increase. So, consider how each loan would impact your other financial assets or the long-term impact the monthly payments may have.

Read More: Personal Loan to Pay off Credit Card Debt

Loan terms

As with any loan, you need to be mindful of the balance between monthly payments and interest costs when looking at loan terms. A longer loan term may make your monthly payments affordable, but that comes with higher interest costs. On the other hand, a shorter loan term can reduce your interest costs but result in higher monthly payments. Be sure to evaluate your budget and determine the monthly payments that will not stretch your budget too thin.

Secured loan vs. unsecured loan

A secured loan, like a home equity loan, will require your house as collateral. If you fail to make timely payments, you may end up losing your home (or any other assets you put as collateral).

If you are unwilling to risk your assets, you need to consider unsecured debt consolidation loans – like a personal loan or a 0% balance transfer credit card. However, you must understand that unsecured loans will carry significantly higher interest rates than secured loans. So, that will affect how quickly you can pay down your debt.

Pros and Cons of Credit Card Debt Consolidation Loan

Pros and Cons of Credit Card Debt Consolidation Loan

Your immediate financial health and short and long-term financial goals factor into the decision of whether you should opt for a credit card debt consolidation loan or not. Weighing the benefits and risks of debt consolidation can also help make this decision easier.

Pros of consolidating credit card debt

If your goal is to paying off credit card debts, consolidating credit card debts can offer you benefits like:

  • Access to better rates to lower your interest costs
  • Predictable and overall lower monthly payments
  • Simpler and easier to manage monthly payments
  • Quicker debt repayment compared to paying off each credit card loan separately
  • Opportunity to build your credit with repayments on a fixed schedule

Cons of consolidating credit card debt

However, a debt consolidation is not a fix-all solution for your credit card debts. You have to consider:

  • A debt consolidation loan alone will not eliminate your debt. You will have to be mindful of your future credit card use and avoid falling into a debt trap again.
  • A credit card debt consolidation loan may come with higher upfront costs or other charges that can make debt consolidation more expensive. Be mindful of any fees you will need to pay before borrowing.
  • Depending on your overall debt and interest rates, simply consolidating your debts may not lower your overall monthly payments. Depending on your credit score or loan term, you may end up paying more in the long run.

Is a credit card debt consolidation loan right for you?

To answer the question, you need to consider the following aspects:

Qualifying for a lower interest rate

If you have an excellent credit score, you will likely qualify for lower interest rates for debt consolidation loans. So, if you consider credit card debt consolidation, you can lower your interest costs compared to paying off individual cards.

Predictable monthly payments

Most credit card debt consolidation loans offer a fixed interest rate. As a result, you have a predictable monthly payment you need to consider when budgeting monthly expenses. However, consolidating your credit card debts only makes sense if you can afford this payment compared to the minimum payments of individual credit cards.

A single credit payment monthly

Trying to pay off balances on multiple credit cards can have you scrambling to manage different due dates and payments. With debt consolidation, you will only need to make one payment per month, making it easier to manage and avoid late fees or bad credit.

However, in some cases, it would be beneficial to look for other avenues to manage your credit card debt. For example, if you have a bad credit score, you will not qualify for lower interest rates than the ones you currently have. Or, if you tend to overspend, you may find it challenging to make timely payments or end up in even more debt with your credit cards. In such cases, a credit card debt consolidation loan will not work for you.

Read More: Does Credit Card Consolidation Hurt your Credit Score

Conclusion

Credit card debt consolidation can be a great tool to manage your credit card debts and regain control over your finances and credit score. It can also facilitate access to lower interest rates and favorable loan terms to make loan repayment easier and faster.

However, before opting for a debt consolidation loan, weigh its options with your current financial status and goals to make sure you benefit from a debt consolidation loan without putting unnecessary strain on your finances.

Epic Loans makes credit card debt consolidation as easy as 1, 2, 3! You can apply online and get in touch with a Debt Consolidation Specialist to understand which debt consolidation product would work the best for you. So start your free evaluation now to find the best solution to your financial problems.

Frequently Asked Questions:

What happens to credit cards after debt consolidation?

It depends on the type of debt consolidation loan you choose. Some debt consolidation options would automatically close your credit cards, while others will allow you to keep your credit card accounts open.

What is the difference between debt consolidation and credit card debt?

Debt consolidation is a tool you can use to combine multiple loans into a single – potentially low-interest, easy-to-manage – loan. On the other hand, credit card debt is the balance you owe on your credit card.

Do we need a good credit score for a debt consolidation loan?

Although not necessary, a good credit score and credit history can make it easier for you to get approval for a debt consolidation loan.