MoneyWise January 2016

Credit card debt consolidation

Money Wise January 2016 - 4Front Credit Union

Credit Card Debt Consolidation might be a strategy for you

Debt consolidation is a repayment strategy involving a NEW loan to combine and cover your other loans or debts. So instead of paying several minimum monthly payments on several bills, you can repay all of your debts with one monthly payment.

Debt consolidation is one way to make paying off your debt more manageable. However it's important to understand that a debt consolidation loan simply transfers the debt, so you still have debt. Keep in mind that debt consolidation is not for everyone but if you examine your options closely, it may help you effectively manage and reduce your debt over time.

Before you even begin looking into this particular strategy, you absolutely MUST make a serious and unbreakable pact with yourself. You MUST NOT allow yourself to use any of the credit lines you're paying off. The point of all this is to pay off your debt not make more. If you fail to keep this agreement with yourself, you could lose a lot more than your credit score.

What if I'm already behind on one of my debts?

Then it's crucial you contact your lender immediately. Most lenders are willing to work with you if they believe you're acting in good faith and the situation is temporary. Some lenders may even reduce or suspend your payments for a short time. When you resume regular payments, though, you may have to pay an additional amount toward the past due total. Other lenders may agree to change the terms of the loan by extending the repayment period to reduce the monthly debt. It's important to ask whether additional fees would be assessed for these changes, and calculate how much they total in the long term.

How do I start the process?

The first step is to check your credit reports and get your credit score. You can get your credit reports from each of the three major credit reporting agencies for free once a year at or a site like Whether you're considering debt consolidation or not, it's always a good idea to monitor your report for negative items you may not be aware of. Your credit report should list most, if not all, of your debts which will help you with the second step - taking an inventory of your debt.

What tips do you have for me once I consolidate?

1.Add extra to your monthly payments and always pay more than the minimum monthly payment, you'll be able to pay off your new loan faster.

2.Avoid tapping into the credit lines you've just paid off. If you don't your hard work will be for nothing and you could end up in more trouble than you started out with. So hide those cards in your sock drawer if you have to because, after all, your goal is to dig OUT of debt -- not to dig the hole deeper!

How can I safely consolidate my credit card debt?

It depends on your situation. Consolidation means that your various debts, whether they are credit card bills or loan payments, are rolled into one monthly payment. If you have multiple credit card accounts or loans, consolidation may be a way to simplify or lower payments.

Here's what you need to know if you are considering these options for consolidation:

Transferring different debt balances to one credit card account

Many credit card companies offer zero-percent or low-interest balance transfers to allow you to consolidate your debt on one account. This will allow you to make one payment and sometimes will result in lower payments.

Warning: Many zero-percent or low-interest credit card offers only last for a limited amount of time. After that, the interest rate on your new credit card may rise, increasing your payment amount. Also, with many of these cards, if you're late on a payment the credit card company can increase your interest rate. Many zero-percent or low-interest balance transfers are subject to a fee (sometimes called a "balance transfer fee"). The fee is usually a certain percentage of the amount you transfer. Additionally, if you use the same credit card to make purchases after you take advantage of the balance transfer offer, you will be charged additional interest on those purchases.

Tip: Make sure you understand exactly when the low-rate on your balance transfer will end. Also, understand whether there are any other fees or costs that can increase your payment amount, like a balance transfer fee or additional interest charges on new purchases made with the card. If you want to avoid interest on purchases after you make a balance transfer, you should plan to use a different card for those purchases.

Taking out a debt consolidation loan

Many lenders offer these loans which collect all of your debts into one loan payment. This simplifies how many payments you have to make to different creditors. These offers also may include lower interest rates than you are currently paying. However, if you consolidate your debts and then incur new debts on top of the consolidation loan, you may end up farther in debt than before.

Warning: Many of the low interest rates for debt consolidation loans may be "teaser rates" that only last for a certain period of time. After that, your lender may increase the rate you have to pay. Find out if there are any hidden fees or costs that you would not have to pay if you continued making your other payments. Also, because you have debt, you might not be able to get the best interest rates that these companies offer.

Tip: Before taking out one of these loans, add up all of your current payments. Make sure you include all of the fees and interest you pay now. Compare these payments with what you would pay if you took out the consolidation loan and make sure it's a better deal.

Taking out a home equity loan

Using a home equity loan to consolidate credit card debt can be risky. Although you may be able to get credit at lower interest if you take out a loan against the equity (wealth) of your home, doing so decreases the net worth of your home and could put your home at risk.

Warning: A home equity loan could create more debt. If you get into trouble paying it back, you could lose your home if you default on your loan.

Tip: Make sure you understand how much you can afford before you take out a home equity loan. Just because a lender may offer you a certain loan amount doesn't mean you should take the whole amount they offer.

Tip: Ask your credit card company about a debt repayment plan. If you get one of these plans, your credit card company might wave late payment or over-the-limit fees or reduce your interest rate to help you pay back your debt.

This article was provided by the Consumer Financial Protection Bureau,