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Credit Card Debt Consolidation

According to the Federal Reserve’s research published last week, overall American credit card debt increased at an annual rate of 7.5% during the final quarter of last year. This could mean that consumers are feeling more confident about the economy and are willing to take the risk that they will have money in the future to pay off debt. These numbers are seasonally adjusted, too, so it’s not a result of holiday spending.

For any individual or family, increased use of credit cards might cause financial turmoil if debt spirals out of control. Even people who understand the guiding principle of spending less than you earn can fall into a debt trap if they spend what they expect to earn rather than what they have in the bank to cover their debt.

Credit card debt consolidationAt some point after a period of indiscriminate spending, the monthly minimum payments on total credit card debt could exceed leftover cash flow after paying for the necessities like food and shelter. This might be a good opportunity to consolidate the credit card balances onto one card. This has the benefit of, in many cases, lowering your total monthly minimum payment. Additionally, you might find a way to significantly lower your interest rate. Of course, if you pay less towards your credit cards, it will take longer to get out of debt, but in some cases when cash flow is tight, having the extra income at the end of the month for saving or for meeting all of your ongoing expenses is more important.

In a perfect world, you would be able to transfer all your credit card balances onto one card that has the following features:

  • 0% APR for the life of your balance.
  • No balance transfer fee.
  • A low minimum monthly payment requirement.

The best credit card is going to be difficult to find, and if you do find one that meets these criteria, it may be out of your reach in terms of qualification. The goal is to find the best deal you can, either from within your current cards or by applying for a new 0% balance transfer credit card.

Start by calling the number on the back of each credit card. Explain to the customer service representative that you plan to move balances from your other cards to this card to pay off your debt, and ask for their best deal for balance transfers. You may find that the issuer offers you an unpublished deal. Be sure to ask about introductory APR, length of the introductory term, regular APR for balance transfers after the introductory period expires, balance transfer fee, and monthly minimum payment.

At the same time, while you’re talking to the customer service representative for each card, you might want to take the opportunity to ask for a lower ongoing interest rate on your card. It can’t hurt. It’s easy to ask, and you might get a cost-saving result immediately.

Don’t make the decision on the phone, however. Write down the terms the issuer offers and do the same for all other cards you own. This will help you compare the offers with the published offers from issuers offering balance transfer deals. Once you compile all information, you can make an informed decision about the best card for consolidating your credit card debt.

You may also wish to compare these offers with a loan for consolidation. Many people have had luck asking for a loan on a peer-to-peer lending network like LendingClub and Prosper, but your state may regulate what you are able to receive through these services.

Watch out for companies that offer to consolidate your credit card debt. Many charge an up-front fee and don’t provide any kind of cost savings beyond what you could easily achieve on your own. At worst, some charge an up-front fee and disappear. If you must seek outside help for your debt, go to a well-vetted non-profit organization that will provide advice, not charge you for their services. Even with this in mind, you’ll need to be careful; some companies appear to be non-profit credit counseling agencies until you look very closely.

Once you transfer your balances to a card, don’t use that card for any other spending. It should be dedicated to paying off your balances over time. Also, don’t immediately close your existing credit cards. You can cut them up, leaving one for emergency spending until you build up an emergency fund in the form of a savings account. Closing your credit card accounts might damage your credit score at a time when you might prefer to keep your number as high as possible.

When I first realized I needed to get out of debt and I had balances across several credit cards, this was one the first steps I took in order to get my finances organized, save money, and find a way to get and stay out of debt. What are your suggestions for consolidating your credit card debt?

Photo: sovietmole
Federal Reserve

Published or updated February 16, 2012.

About the author

Luke Landes is the founder of shizennougyou. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 9 comments… read them below or add one }

avatar 1 Anonymous

What about calling one of those support lines to get financial help?

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avatar 2 Anonymous

I’ve limited my purchases to 2 credit cards, one I use only for the high percentage rewards being offered. I don’t plan on consolidating the two since spending is currently under control, but if I had to, I would transfer the balance from the rewards card to my main card.

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avatar 3 Anonymous

On a somewhat related note, if you ever work with a company to get your debt forgiven, that company may issue a 1099-C to report the cancelled debt. Unfortunately, the IRS sees cancelled debt as taxable income in most cases, meaning you could wind up owing the feds huge chunks of money in April. If you’re in this situation, you should talk to a tax professional immediately to see if you should do anything.

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avatar 4 qixx

One important point i want to highlight it that you must not spend on the cards you transfer balances from or it defeats the point of the consolidation. Cutting them up is a great way to avoid using them but if you don’t cut up the cards make sure you don’t spend on them or you will likely end up just further in debt. I would suggest a cash system when consolidating your debts this way to prevent continuing to spend more than you can afford.

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avatar 5 Anonymous

Also, when you cut up cards be sure to follow through and actually get these accounts closed. Make sure the financial institutions report the closing to the credit agencies. You don’t want too many open credit lines out there.

Many people get excited and pay down some of the debt and really feel they’re making progress but continue to make a huge mistake, which I think was mentioned, and that is they keep spending! Credit card debt is often times just a manifestation of a spending issue! Just a friendly reminder that the habit is hard to break but it must be broken!!

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avatar 6 Luke Landes

You don’t always want to close every account. If any of the cards represents a long history, closing the account can doubly affect your credit score. First, you’re increasing your ratio of used credit to available credit when you close an open account. If the card has a long history, you could be greatly reducing your average credit history, also potentially lowering your score.

Closing credit card accounts must be done strategically. That’s why I didn’t address it in this article.

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avatar 7 Anonymous

Hi Flexo,
Excellent points and much appreciated.

Would this thinking also apply if the end goal was to actually reduce the amount of cards I have available? I’m thinking of it in terms of protecting me from myself.

I’m pretty certain my course will be to eliminate all cards except one to be used for emergency purposes only therely wrestling control from the credit card companies over me and giving me that true sense of financial freedom!

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avatar 8 Anonymous

One other risk that I’ve seen a lot of people fall into is the “tax deduction” trap. They’ll take unsecured debt like credit cards and roll them into Home Equity Loans/Lines of Credit.

Getting a tax deduction is of course a good thing but NOT at the expense of putting unsecured debt into a secured loan which could theoretically potentially put your home at risk!

I’m open to ideas and suggestions that counter this thinking:)

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avatar 9 Anonymous

Thanks for sharing your ideas on this blog. In addition, a fantasy regarding the banking institutions intentions while talking about foreclosed is that the financial institution will not have my repayments. There is a certain quantity of time that this bank will need payments from time to time. If you are far too deep within the hole, they will commonly require that you pay that payment fully. However, i am not saying that they will not take any sort of payments at all. When you and the traditional bank can seem to work one thing out, the actual foreclosure process may stop. However, if you continue to miss payments beneath new program, the property foreclosures process can pick up exactly where it left off.

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