Four signs consolidating your credit card debt might be the right move
You might have heard about debt consolidation as a way to alleviate the stress of monthly debt payments that are dragging you down. But, the question is whether debt consolidation would be a good idea for you in regards to consolidating your credit card debt. We have spent years in the lending industry. We track lenders and financial services companies and studied the personal finance data of hundreds of thousands of people. We want to bring that knowledge and experience together to help answer the question of when it’s time for you to consider consolidating your credit card debt.
Your credit card debts carry high interest rates
Your current debts all have high interest rates is the first sign that consolidating your credit card debt might be the right move. This is perhaps the most important of all the factors when it comes to determining whether consolidating makes sense for you.
Why? Well, the whole point of consolidating your debt is to pay less in interest so you can put more of your money against the principal. This is how you get out of debt. The more money you can put to principal the faster you will get out of debt. If you have higher interest rates, too much of your monthly payment is going towards interest. Paying interest does nothing to get you out of debt. It is just the cost of owing someone else money. So, does it still make sense to consolidate even if you aren’t getting a better interest rate? Not really, especially if the debt consolidation loan comes with an origination fee, balance transfer fee, or lengthens out the term of your loan. But, we’ll discuss this a bit more later in this video.
So, how much lower should the new loan’s APR be? I recommend making sure that your debt consolidation loan’s APR is at least 2-3 percentage points lower than the debt you are consolidating. That lower rate will mean that you cut months off your loan term, especially if you take the money you would have saved by having a lower monthly payment and put it towards principal.
You already have a good credit score
Having a good credit score is the second sign that it might be a good idea to consolidate you credit card debt. Remember, you don’t need to show any loyalty towards a company. If you can get a better rate that helps you get out of debt faster, you owe it to yourself to do that. So, if your credit score is in pretty good shape, you ought to check to see if you can get a lower rate somewhere else.
While lenders rarely actually use credit score in their lending models, it is a good proxy for whether you should be able to get a better rate. A really good rule of thumb is that if your credit score has risen at least 40 points since you last checked your rate, you should be able to get a significantly better deal. Why? Well, no matter where you started, a 40 point change means that you moved up a full credit bracket. Either you moved from Bad to Fair or from Fair to Good or from Good to Excellent. Moving a whole credit bracket means being eligible for better and cheaper forms of credit.
What if you haven’t changed much, but you still have a credit score of at least 660 or better? You should periodically check your rate with lenders to see if someone is willing to give you a lower rate than you are currently paying. Sometimes companies loosen their acceptance algorithm for reasons that have nothing to do with borrowers: for instance, they want to grow faster or they have more money to lend. So, it makes sense to periodically check.
At The Yukon Project, we have tried to make checking easy. If you go to our marketplace page, you can apply to any one of our featured lenders and we will simultaneously check your rate with up to 40 other lenders behind the scenes. Our partners use soft credit checks so applying will not hurt your credit score. We will show you all of the companies that approve you so you can pick the best offer for you.
You have a plan to stay out of credit card debt
Having a good plan for staying out of debt is the third sign that you are ready to consolidate your credit card debt. This one is crucial. If you don’t have a plan to keep from running up your credit card balances, consolidating your credit card debt can be a disaster. Why? Well, because consolidating your credit card debt drops your credit card utilization down to zero. You now have all this extra room on your credit cards to keep spending. If you use that as an excuse to spend a little more or let emergencies pile up on your card, you could find yourself in worse shape than you were before you consolidated. You’ll have a debt consolidation loan AND credit card balances.
Your plan to keep from running up your credit cards could be as simple as closing those cards. But, if you are trying to grow or maintain a credit score, having credit cards with low utilization would be really valuable. You would be better off using what we call the double-auto-pay method. Put a single, recurring bill on a credit card–maybe a streaming subscription–and set your card to be automatically paid in full every month using an ACH authorization. Then, put the card aside and don’t use it for anything else. That way, you get the benefit of an on-time payment being reported to the credit bureaus as well as a low utilization. This is great foundation for a strong credit score.
The most important thing is for you to avoid falling into the trap of building up credit card balances again. And, let’s be honest, you know what that trap looks like for you. If you spend too much, you have to cut yourself off from credit card usage. If you ran into a stretch of bad luck, you have to have a larger rainy day fund. Be honest with yourself and make a plan to give your finances more resilience in the future.
You have multiple monthly credit card debt payments
The last sign that you are ready to consolidate your credit card debt is that you have multiple monthly debt payments. This one is last for a reason. Multiple payments alone isn’t a good reason to consolidate. Sure, it would be convenient to only have one creditor to deal with every month, but that convenience doesn’t actually get you out of debt any faster on its own.
There is one exception to that rule. If you just can’t keep organized enough to avoid being late on your payments, you may need to consolidate just to stay on top of things. Being late on your payments could cost you money a lot of different ways: lenders might hit you with late fees or failed payment fees, you might experience overdraft fees, and if you find yourself late more than 30 days, it will hurt your credit score which would make your borrowing more expensive.
If you aren’t saving money by consolidating with a loan that has a lower interest rate, you could still save money consolidating if right now you are regularly paying late fees because you can’t get on top of things.
Conclusion That It’s Time To Consolidate Your Credit Card Debt
Consolidating credit card balances into a single personal loan can be a great way to accelerate your efforts to pay off your de
bt, but only if you are ready to do it correctly. Get a lower APR. Strengthen your credit score. Make a plan to stay out of debt. Or, avoid the cost of multiple monthly payments.
Make a plan today to gain the peace of mind of living a debt-free life.
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