Credit card debt consolidation takes multiple bills from multiple card companies with multiple balances and multiple payment dates and merges them into one payment with tons less stress.
Done properly, Mastercard consolidation reduces the rate of interest you pay on Mastercard debt, saves you money, and simplifies your finances.
There are 3 ways to consolidate Mastercard debt:
Debt Management Plans: debt management plans offered by nonprofit credit counseling agencies, who usually work with creditors to lower interest rates and also make one monthly payment from you and disburse the funds to your creditors each month.
Credit Card Consolidation Loans: A DIY approach during which you borrow an outsized sum (hopefully at a lower interest rate) to pay off the balance on each Mastercard. This can be through with a private loan, home equity loan, balance transfer MasterCard, or 401(k) loan, but the result’s an equivalent – one consolidated debt.
Debt Settlement: You stop paying creditors. Instead, you make periodic payments to a debt settlement company in an attempt to build up a lump sum of money to offer each creditor and settle the debt.
Consolidating Credit Card Debt in 10 Steps
Each form has pros and cons attached thereto, counting on your resources, your discipline level, and your desire to eliminate Mastercard debt. For most consumers, the debt consolidation process maybe a 3-5 year program that ought to include a commitment to limited or no use of credit cards.
Each one of the programs requires research. Like every project, it pays to try to to a touch preparation work before diving certain an answer.
Step 1: Calculate your monthly income and expenses.
The start line for consolidating debt is to try an in-depth examination of your budget. List all your sources of income and all expenses in as fine a detail as you can. This will allow you to answer questions and compare numbers among the various credit card debt consolidation options.
Step 2: Get a copy of your credit report.
Federal law entitles you to at least one free credit report per annum from AnnualCreditReport.com. Your credit report will list each of your creditors and the amount of money you owe them.
After you’ve got identified each creditor, log in to every individual account, and write down the rate of interest and a minimum monthly payment of every. The information from your credit report, your budget, and each account allows you to answer the following questions:
Step 3: what’s your total amount of Mastercard debt?
The amount of Mastercard debit is the first indicator of which Mastercard consolidation strategy is best for you.
For example, if you have a small amount of debt, maybe only a couple thousand, then credit card refinancing with a zero-percent, balance-transfer credit card might be your best option. Larger amounts of Mastercard debt would require a more comprehensive strategy.
Step 4: what proportion of your income are you able to budget toward debt?
You should be left with a sum of cash after totaling your monthly expenses (not including Mastercard payments) and subtracting your monthly income. If not, then you would like to chop items from the expense side of your budget or find how to form additional income.
The money remaining after expenses will determine the monthly payment that you simply can afford. There is no use in accepting a loan with a $600 monthly payment if you simply have $500 left in your budget after expenses.
Step 5: What is your average interest rate?
Because each rate of interest is attached to a special Mastercard balance, what you’re really trying to find is that the weighted average rate of interest. You can find a web calculator or calculate this yourself.
First, calculate the weight factor of each credit card by multiplying the interest rate by the balance.
Credit Card A: 10,000 x 20% = 2,000
Credit Card B: 4,000 x 15% = 600
Next, add the weight factors together, and add the credit card balances together
Weight Factors: 2,000 + 600 = 2,600
Credit Card Balances: 10,000 + $4,000 = 14,000
Then, divide the entire weight factor by the entire Mastercard balance and multiply by 100
therefore, Average Weighted Interest Rate: (2,600/14,000) x 100 = 18.571%
Your average weighted interest rate is the number any consolidation loan needs to beat.
Step 6: What is your credit score?
Maybe the foremost consequential step of all: locate the credit score on your credit report.
Your credit score is the best indicator of which credit card consolidation category is best suited for you. If your score is under 660, you’re going to have a hard time qualifying for a personal loan or balance transfer credit card.
Credit scores are based largely on your credit utilization ratio, which is your credit limit versus what proportion you owe on each card. That means if your credit cards are maxed out, then chances are your credit score has taken a huge hit.
Even if you are doing qualify for a mastercard consolidation loan, the interest rates you are given probably won’t compete with what you’ll get with a debt management plan.
Step 7: Do I even have assets to borrow from?
The lowest interest rates go to loans using assets as collateral. That is because if you fail to form your payments, the lender can take your asset as payment.
It’s risky to take an unsecured debt, like credit card debt, and turn it into secured debt, like a home equity loan or 401(k) loan. If you miss mastercard payments, you’ll need to affect late fees, higher interest rates, and debt collectors.
But at least you won’t lose your home or retirement fund.
Step 8: Are my debts already in collections?
If you haven’t made a payment on your credit card debt for over 180 days (six months), your account is in default, your credit score already has collapsed and most credit card consolidation options are off the table.
In most cases, your account is usually sold to a debt collector, which can make your problem even worse.
Counselors who offer debt management plans work only with original creditors, not collection agencies. Being in default means you likely won’t qualify for a loan from a bank, depository financial institution, or online lender.
Your best bet is either debt settlement or bankruptcy, counting on your income and amount of debt.
Debt collectors buy debts for nickels on the dollar, so if you’re ready to save enough money there’s an opportunity they’re going to accept a lump-sum payment for a fraction of what you owe. This can be done through a debt settlement company or, you can simply call up the debt collectors and negotiate directly with them.
Step 9: What is your debt-to-income ratio?
If you have made it through steps 1-8 and nothing seems to be adding up, it’s time to take a look at your income in relation to your debt.
It is highly unlikely that you simply will get approved for a loan with a debt-to-income ratio over 50%, albeit your credit is pristine. It is also unlikely you’ll be ready to save enough money to settle your debt if your current income barely allows you to form ends meet.
Bankruptcy is a last resort, but if you have an extremely high amount of credit card debt and a very low income, it could be your only option.
Step 10: Pick a plan and follow through.
Much of what was just covered is often achieved through a credit counseling session at a nonprofit financial agency. Their certified credit counselors walk you thru this process and use the knowledge they gather to form a debt-relief recommendation.
Whatever the recommendation, make certain to follow through with the plan. Debt is a slippery slope. There are landmarks along the way that should serve as wake-up calls like the first time you carried a balance on your card or made only the minimum payment or the primary time you missed a payment or were denied a replacement line of credit or the primary call from a set agency.
The further along you are, the fewer debt relief options you have. Find out which point you are at and choose one of these types of credit card consolidation.
Types of Credit Card Consolidation
As mentioned before, there are 3 ways to consolidate Mastercard debt, and every option is best fitted to different scenarios.
If you meet the eligibility requirements, debt management plans work best in most cases. Credit card consolidation loans work for people with good credit and solid income. If your debt has been sold to a set agency, debt settlement could be your only choice.
Debt Management
Debt management programs (DMPs) are one of the lesser-known credit card debt consolidation options, but are the easiest one to qualify for and might be the most effective of any method.
There is no loan involved so credit scores aren’t a qualifying factor. The nonprofit credit agencies administer DMPs, work with the cardboard companies to scale back interest rates, and are available up with a reasonable monthly payment, supported your income.
Interest rates on your Mastercard debt typically drop to around 8%, sometimes even lower. The counseling agencies also attempt to eliminate or reduce late payment fees.
Credit counseling agencies do check out your credit report back to make an honest evaluation of your income and expenses. If they see that there is enough income to pay down the debt, they enroll you in a debt management program that usually takes three years to complete.
If your situation doesn’t fit their parameters, they recommend one among the opposite Mastercard consolidation options as an answer.
Credit Card Consolidation Loans
The most popular option to consolidate MasterCard debt is removing one loan to pay off all of your Mastercard debt then repay the new loan.
Debt consolidation loans make sense, but only if you plan to stop using credit cards while you pay off the new loan you just took out. If not, you’ll have two problems, instead of one. The real question you must answer before choosing one of the below as a solution is whether it makes sense to create a new loan (debt consolidation) in order to satisfy an old loan (credit cards) that you simply couldn’t pay off to start with?
There are a couple of sorts of Mastercard consolidation loans, anybody of which should, at the very least, offer you a far better rate of interest than what MasterCard companies charge.
Personal Loans
Banks make most of these loans, but experts advise an unsecured loan from a credit union might be the best place to find one with an acceptable interest rate. Credit unions can play with their lending requirements, especially if you’ve been an honest customer. Online lenders can consolidate debt, too, but the rates could also be too high for it to form sense.
Zero-Percent Balance Transfers
This is a safe option if you qualify! This offer usually is out there to the simplest customers, meaning people that make on-time payments and have a credit score of 670 or higher. You transfer your current card balance to the new card and pay zero-percent interest thereon, usually for 12-18 months. There also could be balance transfer fees of 3%-5% of the amount transferred. And when the introductory zero-percent rate expires, you’ll be paying 20% or more on whatever balance is left on the cardboard. This is an honest option, but as long as you’re committed to paying down the debt by the time the introductory rate period ends.
Home Equity Loans
The fact that you are willing to put your home up as collateral assures that you will get a far lower interest rate on a home equity loan than what you’re paying the card companies. However, if you get behind on payments – and your payment history suggests that is a possibility – the lender could foreclose and you would lose your house. Big risk, big reward.
Borrow From Retirement
Borrowing from retirement may be a terrible idea and absolutely a final resort option. Many 401(k) plans allow participants to borrow 50% of their pension plan balance or $50,000, whichever is a smaller amount. If you are 59.5 years old or younger and don’t repay the money, you will have to claim it as part of income taxes, plus pay a 10% early withdrawal penalty. If you borrow, you must pay the money back within five years. If you leave the money in the retirement account, it is protected against creditors should they come after you. In other words, there is almost no reason to even consider this option, but it does exist.
Debt Settlement
If your credit card debt has grown beyond your ability to repay or if you just want to run from this problem as quickly as possible and don’t care about consequences, debt settlement might be your solution.
Debt settlement companies usually offer a percentage of what you owe to creditors, many claims they can cut it in half – and hope the lender will accept that amount as full payment. So, for example, if your credit card debt is $20,000, you (or a company you hire to do your bidding) could offer 10,000. In case the card company accepts then you send them a lump-sum payment of 10,000, and the debt is settled.
Who wouldn’t want to do that? Well, card companies for one and other lending institutions aren’t keen on it either. Those are just two of the reasons to look deep at this before choosing it.
The debt settlement process typically takes 2-3 years.
Debt settlement companies want you to send them any money you’d be using for payments, instead of sending it to the creditors. This means that late fees and interest are added to your total monthly.
Card companies don’t have any obligation to accept settlement offers and some won’t even deal with debt settlement companies.
If you employ a debt settlement, it goes on your credit report for seven years and will hurt your credit score by the maximum amount as 100 points.
Even if you get the amount owed reduced by 50%, by the time you pay the company’s fees and the late fees, your actual savings would be closer to 20%-25%.
For some people, none of that matters. They’re happy to be out from under it. However, if you plan to get a car or home loan in the next seven years, this could be a problem.
