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  • Writer's pictureJames Heinz

Best Way to Consolidate Credit Card Debt without Compromising your Credit Rating

Updated: May 26

Far too many Americans struggle with credit card debt. The average cardholder owes over $6,500 in credit card balances. Faced with high interest rates and multiple payments, many feel stuck in an endless cycle of debt. Fortunately, a solution can provide relief: credit card debt consolidation.


When done right, consolidating your credit card balances is one of the best ways to regain control over your finances and chart a path out of debt without damaging your credit score.

Ready to find the best way to consolidate debt? Let’s take a dive into the key takeaways on credit card debt consolidation first.


Consolidating Credit Card Debt Without Damaging Credit Scores


best way to consolidate debt

  • Consolidating credit card debt can streamline payments and reduce interest costs

  • Key methods include balance transfers and personal consolidation loans

  • Short-term credit score dips are normal but can improve over time with on-time payments

  • Consolidation enables a clear payoff plan and accelerates debt freedom

  • However, upfront fees and discipline are required to see the full benefits


Credit Card Debt Consolidation vs. Other Debt Consolidation


It's important to distinguish credit card debt consolidation from other forms of consolidation. With credit cards, you are consolidating unsecured revolving debt. This differs from consolidating secured debts like mortgages or auto loans. The consolidation approach varies for these different debt types.



Prevalence of Credit Card Debt in America


Before exploring consolidation methods, let's look at the prevalence of credit card debt in the U.S.


  • Over 60% of U.S. households carry credit card balances

  • Average household credit card debt exceeds $8,483

  • Total U.S. credit card debt surpassed $1.13 trillion in the last three months of 2023

  • Credit card delinquencies spiked during the pandemic but are now declining


Stagnant wages, unexpected expenses, a lack of emergency savings, and rising living costs are some of the factors driving this debt surge. For some, revolving credit became a lifeline for making ends meet.


With the groundwork laid, let's unpack how consolidation could be your ticket out of this financial maze.


Debt Consolidation for Credit Card Debt Explained


Debt Consolidation for Credit Card Debt

So how exactly does credit card debt consolidation work? The basic idea is to combine multiple credit card balances into a single monthly payment, ideally with a lower interest rate. This streamlines the repayment process and reduces the overall interest costs over time.


The two most common consolidation methods are:


1. Balance transfer credit cards

  • With this approach, you open a new credit card that offers a 0% intro APR promotion on balance transfers (typically 12-18 months)

  • You then transfer your existing credit card balances to this new card during the promotional period

  • This allows you to pay off the balances at 0% interest for the intro term instead of higher APRs

  • Once the 0% period ends, any remaining balance begins accruing interest at the regular APR


Balance transfer cards provide an interest-free period to pay down debt more affordably. However, a 3-5% upfront balance transfer fee is usually charged.


2. Debt consolidation loans

  • For this method, you take out a fixed-rate personal loan from a bank, credit union, or online lender

  • You use the loan funds to pay off the combined total of your credit card balances

  • Rather than revolving credit card payments, you now have a single personal loan installment payment

  • Loan terms typically range from 2-7 years depending on the loan amount and credit profile


Personal loans for debt consolidation aim to secure a lower fixed interest rate than credit card charges. With good credit, rates under 10% are possible. The fixed payment schedule also provides a light at the end of the tunnel.


Both balance transfers and personal consolidation loans allow you to go from juggling multiple credit card payments at high APRs to one streamlined payment, ideally with a lower cost overall. Prepaying interest is avoided, and you have a clear roadmap to freedom from debt.


Given the potential for both short-term and long-term credit effects, it's essential to consider all angles before deciding. Ready to weigh the pros and cons?

Exploring debt consolidation options can feel overwhelming, but Shepherd Outsourcing offers tailored advice and personalized debt management plans to simplify the process for you!


Impact on Credit Scores


Impacts on credit scores might have you raising an eyebrow; let's smooth out those concerns.


Short-Term Effects


One concern with consolidation is the potential short-term impact on your credit scores. Your scores could dip slightly due to:


  • New credit application for a balance transfer card or consolidation loan

  • Increase in loan balance when paying off multiple credit card accounts


However, these credit score effects are usually minor and temporary.


Long-Term Gains


Credit card debt consolidation can boost your credit standing over time when handled responsibly.


  • A single payment is easier to manage, reducing late/missed payment risk

  • As balances decrease, your credit utilization ratio will improve

  • Paying off revolving debt frees up available credit for future needs


The key is diligently following through on the debt payoff plan. This demonstrates an ability to manage credit wisely.



Advantages of Consolidating Credit Card Debt


Beyond the credit benefits, consolidation offers several advantages.


  • Faster debt freedom by paying less in interest charges

  • Clearly defined payoff plan with a target date in sight

  • Opportunities to lower interest rates through promotions or better loan terms


For example, consolidating $10,000 in credit card debt at 20% APR to a 5-year loan at 10% APR could save over $3,000 in interest.


While navigating these advantages, having a partner like Shepherd Outsourcing can provide additional benefits. Their expertise in creating personalized debt management plans ensures that your journey to debt freedom is effective and  tailored to meet your personal financial circumstances!


Potential Downsides


While beneficial overall, consolidation is not without some drawbacks.


  • Balance transfer and loan origination fees can add upfront costs

  • Loans may extend repayment timelines compared to aggressive card payoffs

  • Missed payments reset deferred interest or trigger penalties, negating benefits


Research the fine print closely. Discipline is required to avoid reversing any progress.


Is Consolidation Right for Your Credit Card Debt?


Only you can decide if consolidating credit card balances is the best solution.

Key factors to evaluate:


  • Your current credit score and ability to qualify for better terms

  • Monthly cash flow situation and ability to afford new payments

  • Overall debt level and goals for eliminating debt burden


Be realistic about your financial circumstances and commitment to repayment. Don't pursue consolidation if you can't afford higher monthly obligations.



Exploring Other Debt Relief Options


While consolidating credit card debt can provide significant relief, it's not the only option for dealing with unmanageable balances. Depending on your financial situation, one of these other debt relief strategies may be more suitable:


1. Debt Management Plans

A debt management plan (DMP) through a non-profit credit counseling agency can simplify payments without a consolidation loan. With a DMP:


  • You make one monthly payment to the agency

  • They disburse payments to each of your creditors on your behalf

  • The agency may be able to negotiate lower interest rates and fees

  • Enrolled debts are closed so, no new charges can accrue

  • A DMP aims for full balance payoff, typically in 3-5 years


DMPs don't require a loan but get noted on your credit report, which can impact scores initially. However, on-time plan payments can help improve credit over time.


2. Debt Settlement

Deb settlement may be an option for consumers struggling to make minimum payments. With this strategy:


  • You withhold payments and instead deposit funds into a dedicated account

  • Once a lump sum accumulates, it is used to negotiate partial payoffs with creditors

  • Settled accounts are reported as "settled for less than full balance" on credit reports

  • Debt settlement has significant negative credit score impacts


The settlement allows you to resolve debts for less than the total amount owed but at a major credit rating cost.


3. Bankruptcy

When all other options are exhausted, filing bankruptcy can eliminate legal debt. Chapter 7 liquidates non-exempt assets while Chapter 13 involves a 3-5 year repayment plan.


Bankruptcy is the most severe form of credit score damage, lasting 7-10 years. However, it allows for a fresh financial start by discharging eligible debts entirely.


Considering various debt relief options, it's important to work with a company that understands the complexities of debt management. Shepherd Outsourcing offers comprehensive solutions for those overwhelmed by debt, helping you choose the best path forward with confidence and clarity!



Consider the Credit Impacts


Each of these debt relief paths impacts credit scores and reports differently:


  • Consolidation may cause minor, temporary credit score drops

  • Debt management plans get reported and can initially hurt scores

  • Debt settlement significantly damages scores due to missed payments

  • Bankruptcy filing tanks scores but begins repairing credit over time


Your current credit standing, income, asset levels, and debt amounts will determine the most appropriate strategy for your situation. Be sure to weigh the credit impacts against the need for relief.


After exploring the broader landscape of debt relief options, consolidating credit card debt comes back into focus as a balanced choice. Let's circle back and wrap up our journey with some final thoughts.


Conclusion


Consolidating credit card debt is one of the best strategies for regaining control of finances. It simplifies payments, reduces interest costs, and puts you on a path to eliminating debt. Though there may be short-term credit impacts, consistent on-time payments will overcome this over the payoff period.


The key is following through diligently on whichever plan you choose - a consolidation loan, balance transfers, or another solution. Seek help if you need it, but stay committed. When used responsibly, debt consolidation can lift a tremendous burden and help your credit bounce back stronger than ever before.


Navigating the path to debt freedom doesn't have to be a journey taken alone. Shepherd Outsourcing understands this and provides compassionate support and personalized strategies to help you regain control of your finances with a plan that fits your unique situation! Click here to explore your debt management options and start your journey to financial freedom today!

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