Consolidating high-interest credit cards is one of the effective ways that you can improve your current financial situation. Failing to deal with it can really endanger the dreams that you have set for your future self.
Debt has a way of compromising your financial growth and stability. If you want to have a more secure financial future, you need to control your debts. It is not necessary for you to stop using debt entirely. But it is a must that you learn to use it wisely. This is especially true if you are forced to use high-interest credit cards.
The truth is, it is possible to keep the high-interest from affecting your finances. This interest will only affect your balance through finance charges. This is the amount that is added to any balance that is carried over to the next billing cycle. If you pay off your debt within the grace period (time between your purchase and the billing due date), there will be no finance charges.
But what happens if you already have too much balance in your high-interest credit card accounts?
According to reports, a lot of people who use credit cards do not pay their balance in full when the billing statement comes. 44% of American adults are stuck with high-interest revolving credit that has an average of $6,600 balance. What is even more alarming is the fact that these people only have modest incomes. With the high debt payments and equally high cost of living, it is obvious that it would be very hard for them to completely pay off their debts.
This is where consolidating high-interest credit cards can be very useful.
Why consolidating high-interest credit cards is a must
There are many reasons why consolidating is a must if you have a lot of high-interest credit card debts.
It is bad for your credit score
First of all, the high-interest on your credit card accounts can quickly make your balance grow and that can be bad for your credit score. Credit utilization has a huge influence on your credit score. If you let your balance grow, it will have a negative effect on your credit score. Consolidating it will allow you to manage your debts easily. With everything under your control, you should have an easier time paying it all off.
It will lead to high finance charges
Another reason why consolidating high-interest credit cards is a good idea is because of the high finance charges. We explained how this will increase the balance that you carried over to the next billing cycle. But we did not explain how it is calculated. Creditors compute the finance charges by using the interest rate and your remaining balance. That means the higher the interest rate, the higher the finance charge that will be added to your debts. According to reports, Americans paid up to $113 billion worth of credit card interest – and this was only in 2018. That is a huge amount of money that could have been used on something else. The faster you can take care of your credit card debts, the less you have to worry about finance charges.
It will make future financial aid difficult
When you have a lot of debts and a low credit score, you will find it hard to get financial aid in the future. That means if you want to buy a house, it will be harder to get the lowest interest rate for the debt. This would lead you to pay more towards the debt as a whole. Fortunately, consolidating high-interest credit cards will help improve your credit score. At least, if you meet your payments consistently without being late. As you lower your balance, you will see your score go higher and that increases that chances of getting a great deal out of any credit account that you will open in the future (e.g. mortgage, business loan, etc).
Different ways to consolidate high-interest credit cards
Now that you understand why consolidating high-interest credit cards is a must, it is time to find out how you will go about it. You have a couple of options if you want to consolidate all your high-interest credit cards.
Use balance transfer
The first option is to use another credit card. Balance transfer cards can be used to consolidate credit cards because it can specifically solve the issues you have with the high-interest rate. This is a new credit card account that is offered with a very low-interest rate – up to 0%. Obviously, it will serve you best to go for the 0% interest. This usually requires a balance transfer fee – but that will depend on the specific creditor you will apply to. These fees are usually paired with a longer promo period. Do the math and see if you will save more if you just pay the balance transfer fee as long as it gives you a longer 0% rate period.
Borrow a debt consolidation loan
Another option for consolidating high-interest credit cards is to borrow a loan. This is called a debt consolidation loan. It is a type of loan that is specifically used to consolidate multiple debts. You will borrow the loan and when approved, they will arrange to pay for all your credit card accounts. After that, you just have to pay for this loan. It is all easier at this point. You can choose the length of the repayment period. If you can pay more, you can get a shorter repayment plan. If you can only afford a lower monthly payment, then get a longer one. Since this is a loan, it is usually offered with a lower interest rate – at least compared to credit cards. If you have a good credit score, it will be lower.
Use your home equity
Finally, you also have the option to use home equity loans in consolidating high-interest credit cards. If you have enough equity in your home, you can use that to eliminate the high-interest rate on your debts. This is a secured debt so it will be offered at the lowest rate. You can also consolidate other types of debts. If you have the right mindset about this, you can keep yourself motivated in paying the debt by thinking how it will all go to your equity anyway. As you make payments, you are growing your net worth through the house. That should help you complete the debt relief program until the very end.