Does it feel harder and harder these days to get by on your current income? Could you use more disposable income?
If so, there may be an easy way to give yourself a budget boost without taking on a second job, and the best part is that you’re the one in control.
Consolidating Credit Card Debt
Consolidating your existing credit card debt could be the key to having more money in your pocket. Sound hard to believe? If so, you could be in for a big (and sweet) surprise.
Credit card debt consolidation is a great strategy that could help you save more by paying less interest every month.
There are 3 easy steps to see if credit card debt consolidation is right for you.
Step 1: Get a good grip on the dollar impact of credit card debt.
You may have heard many financial experts recommend that you should get out of credit card debt. But you may be wondering … just how much it could cost you to carry that debt?
Here’s an example:
- Let’s say you have $15,000 ofcredit card debt.
- Let’s say your interest rate is 15%1.
- Let’s also say you pay $359 each month toward that debt (slightly more than the minimum payment required each month).
- YOUR TOTAL INTEREST CHARGES would be $6,349 by the time you paid off your $15,000 of credit card debt2. And that assumes you didn’t make any new purchases.
Got the picture? You’re ready for Step 2.
Step 2: Explore your options to get out of credit card debt.
Now that you’ve sized-up the problem, let’s see what solutions are available and determine which one offers you the best path to get out of credit card debt.
One option is to increase the amount you pay each month. The upside: You’ll pay off your credit card debt sooner which means you’ll pay less in total interest. What’s the downside? You’ll be paying a higher payment every month and a bigger bill might feel tight in your monthly budget.
Another option is to go the “balance transfer” route. Here, you pay off one credit card with another credit card that has a lower interest rate. The upside: You’ll save on interest charges, assuming you don’t add more debt, of course. What’s the downside? Many balance transfer offers have an up-front fee that could reduce the money you would save from a lower interest rate. Also, be aware that those very low or 0% rates are often introductory rates that expire and are replaced by the higher standard rates. When that happens, you may never actually realize those future interest savings. Finally, some credit cards that come with balance transfer offers also come with an annual fee that can also reduce your overall savings.
Are there any other smart options?
Here’s a popular one: Personal loans for credit card debt consolidation. The upside: When you pay off credit card debt with a personal loan, you can lock in a fixed rate (one that doesn’t rise) and fixed monthly payment (one that doesn’t change month-to-month). Plus, using a single personal loan to consolidate multiple debts, you’ll downsize and simplify your monthly bill paying. And if you get a personal loan with a fixed interest rate that is lower than your credit card interest rate, you could immediately save money in interest every month. What’s the downside? Some personal loans have fees up front, such as application and closing fees. Some may also have prepayment penalties if you pay off the loan early.
Personal loans from lenders like Discover don’t have application or closing fees, nor do they have a prepayment penalty fee, which can be an advantage when it comes to credit card debt consolidation.
Step 3: Compare when you’re shopping personal loans for credit card debt consolidation.
If you’re thinking about using a personal loan to get out of credit card debt, it’s important to be a smart shopper.
Put these 5 on your comparison shopping list: Good interest rate, fixed payment, choice of loan length, no application or closing fees, and no prepayment penalty.
- Shop for a rate that’s lower than what you’re paying currently on your highest credit card debt. Keep in mind that some lenders may offer low rates but have high fees.
- Look for a fixed rate instead of a variable rate, so that you have the same payment every month. This makes monthly bill-paying easier. (As a contrast, a “secured loan” like a home equity line of credit typically has a variable interest rate – it’s not predictable and could go higher.)
- Seek a choice in loan length (“term”), such as 36 – 84 months. That way, you can set up your personal loan to have a monthly payment amount that works with your budget.
- Steer clear of loans if that have added costs like application, origination, or closing fees. (While some lenders may have multiple fees of this type, Discover is one lender that offers personal loans with none of these fees.)
- Make sure there’s no prepayment penalty so you’re able to pay off your loan at any time you like, without a fee for paying it off early.
The bottom line here is about gaining more control.
1. www.creditcards.com – National average credit card APR as of 9/30/15.
2. The estimated calculation assumes that you make fixed monthly payments of $359 on time every month until your loan is paid in full, and do not incur additional balances on your existing higher-interest debts. Total interest is based upon a fixed APR of 15% calculated on the average daily balance on a simple interest basis with payments credited to interest then principal, on the last day of the month. Paying more towards your credit cards or more towards your Discover loan will reduce interest paid and the repayment period. Actual results may vary.