If you are looking at how to consolidate a credit card debt, you are probably in a financial jam and need help. If it proffers you any solace, you are probably one in a million or more. Did you know that as early as November 2019, there were 374 million open credit card accounts in the U.S.? That’s probably because an average American cardholder has approximately seven credit cards.
You can try to consolidate your credit card debt by opting for a lower interest rate, and saving considerably on interest payments is one significant benefit of consolidating your debt. When you make the same monthly payment with a lower interest component, there’s more money to repay the principal. A debt consolidation plan helps the debt balance reduce quicker than you expected than it would if you were paying a higher rate of interest.
Here’s what you benefit from if you consolidate your debt:
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Making One Consolidated Payment instead of Many
Paying down debt becomes a lot simpler when you consolidate a credit card debt, resulting in lower monthly payments. Also, you get a more extended pay-off period and an immediate relief from your financial worries.
Typically, you must have multiple credit card accounts with balances, and consolidating all into one payment is a smart move. Undoubtedly, you still have your debts because they never go away magically, but you no longer have to worry about multiple payments but just one every month.
Relatively Lower Interest Rates
When you opt for a debt consolidation plan, you immediately start saving on the interest you have been paying all along. Credit card debts attract high rates of interest that keep adding up with penal interest (for unpaid debts) you need to settle regularly. Once you pay off multiple, high-interest debts after consolidating them into one payment, your new single account attracts a much lower interest rate.
However, a credit score plays a significant role in your financial affairs. Your credit score is proportionate to the interest you pay, and a poor credit score attracts a high rate of interest and vice versa.
Did you know that the average interest rate for accounts with an excellent credit rating (720 to 850) is in the region of 4 to 20%? However, the interest rates for an account with a poor credit rating (300 to 639) can be anywhere between 15 to 36%. Regardless of which credit rating bracket you come under, the interest rate of your consolidated debt will be lower than what you pay currently.
Hope for Better Credit Scores
Debt consolidation has a fantastic benefit when it comes to the change in your credit scores. Once you opt to consolidate a credit card debt, your credit rating gets a much-deserved boost. You can examine this out by taking a new personal loan because you’ll notice the positive change in your credit scores after a few monthly repayments. This better credit score is because you would have reduced your credit utilization ratio, which is arrived at by simple math – your dues divided by your current credit limit.
For example, if you have $4000 credit available on your credit card with a balance of $2000, your credit utilization ratio is 50% as you are availing only half of your eligibility. However, whenever you acquire new credit, it reflects a dip in your credit scores, a temporary phenomenon. On the brighter side, you save on the interest you pay, and on a long-term basis, your credit scores will improve after a while.
Clearing Debts Faster
If your credit card debts keep mounting, the repayment can go on for many years. The longer you take to pay, the happier your creditors are because they earn additional sums as interest. However, a debt consolidation plan helps you clear your debts faster and get out of the debt trap within 3 to 5 years.
Psychological Benefits
Financial messes cause immense stress, leading to health issues. However, when you opt for a debt consolidation plan, you will manage multiple payments as one, which gives you freedom from unnecessary stress. It would help if you took control of your finances and well-being, and a debt consolidation plan is the best way to achieve this.
Having to pay just one bill instead of multiple accounts every month acts as a stress-buster and boosts your self-confidence. Having fewer easily manageable debts gives you a clear picture of your financial situation.
The well-defined path that a debt consolidation plan offers you helps you get instant relief from the stress you are undergoing. Perpetual stress can lead to severe health conditions like cardiac disease, Alzheimer’s, depression, diabetes, asthma, obesity, etc. Clearing your debt helps boost mental and physical health.
Summing it Up
Poor financial management leads to the accumulation of debt. A sensible debt consolidation plan can help you get out of the debt trap and manage your finances better.