The COVID-19 pandemic has presented tens of millions of Americans with financial challenges. And when such challenges arise, many times any pre-determined debt repayment plan must be reassessed as a means of weathering the storm.
While experts always suggest prioritizing paying off credit card debt before anything else due to high interest rates (the average credit card interest rate is at about 19 percent), your repayment plan may have been thrown for a loop. One way to save money on outstanding debt, while still ensuring that you’re paying it off and meeting your obligations, is to consolidate it. In this post, we’ll take a closer look at debt consolidation and whether or not it makes sense for you.
Debt Consolidation 101
So just what is debt consolidation? Specifically, it’s the practice of merging outstanding debt from multiple credit cards into one loan balance or transferring balances to one credit card, and then paying this balance off.
If you’re transferring credit card balances to one card, you’ll want to choose the one with the lowest interest rate for the largest potential long-term savings. You can also qualify for a personal debt consolidation loan, which can also offer a long-term savings.
How Does Debt Consolidation Work?
There are a few ways debt consolidation can work. One, you can see if you’re able to perform a balance transfer from one credit credit to another. This way, you’ll essentially be paying off just one credit card, albeit at the current interest rate of whatever credit card you’re paying it on. You’ll also likely have to pay a transfer fee that’s either set or equal to a percentage of the amount you’re moving. Some credit cards don’t charge anything to transfer balances, though you often need exceptional credit to qualify for such.
Another option is a personal debt consolidation loan, where you’ll be paid the sum of the loan by your lender to pay your credit cards off. Then, you’ll just work on paying the lender back over time with interest on what you borrowed. Interest rates on personal loans can be as low as 4 percent, and if you take this route you may have up to seven years to pay back the lender.
Bottom Line
The biggest factor to take into consideration when it comes to debt consolidation is your own personal situation. If you have significant credit card debt and you’re only able to make the minimum payment on each account, you’re going to be paying a lot more long-term considering the high credit card interest rates. It’s where it can make sense to transfer balances to a low APR credit card or apply for a personal loan at what’s likely to be an even lower interest rate.
Another important factor is being disciplined enough to keep spending in check so that your credit card balance doesn’t balloon. This latter point can be easier said than done, especially in economically trying times.
