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Four Quick Tips on Credit Card Consolidation

Question: Can you give me some tips on credit card consolidation? My credit cards are maxed out, I’m paying a ton in interest, and my credit score is suffering as a result!

Answer: You are wise to look for tips on credit card consolidation. Having a high balance on your credit cards is bad news for your credit score and your wallet, so if you are learning how to build credit, lowering your credit card debt is one of the smartest things you can do. In fact, almost one-third of your credit score is based on the debt you carry, with points being deducted for people whose credit card balances are over 30 percent their limit.

With that in mind, sometimes spreading out your debt among several credit cards is smarter than credit card consolidation. Let’s say, for instance, that you have one credit card with a $900 balance and a $1000 limit, and you have two credit cards with a $0 balance and a $1000 limit. In this scenario, you have one credit card with a balance that is 90 percent its limit–bad news for your credit score.

If each of these cards carried a $300 balance, your balance on all three cards would be 30 percent their limit–good news for your credit score.

If you want to learn how to improve your credit score, one of my tips on credit card consolidation is to think twice before consolidating all debt onto one card. Only use this strategy if:

1. Your balance will still be under 30 percent of the limit.

2. Your interest rate on this card is lower than it is on other cards.

A consolidation loan basically bundles several loans (or, in your case, credit card balances) into one loan with a lower interest rate that allows you to make just one payment, often for less. Some banks offer debt consolidation loans, but these loans usually have to be secured by property (such as a car or a home), which isn’t always a realistic option.

With that in mind, here are some other tips on credit card consolidation that offer an alternative to the traditional debt consolidation loan:

1. Ask your boss for an advance. This might allow you to pay your credit card debt in its entirety. You can then slowly start “repaying” your boss by having a percentage of your paycheck withheld. Be careful about this strategy as it should not be used unless you are a loyal employee with a strong and long relationship with your boss. If you have worked at your office for only two months, you should find another strategy.

2. Try to renegotiate the terms of your credit card debt. In today’s environment, banks have a strong incentive to renegotiate terms, especially for people who have missed payments. With bankruptcy up 32 percent in 2009 (according to the Automated Access to Court Electronic Records and the American Bankruptcy Institute), creditors are afraid of losing their clients. They would rather you pay something than nothing.

3. Among the easier tips on credit card consolidation is to ask your local bank or local credit union if you can obtain a loan. You will likely have an easier time at a local credit union than a big bank.

4. Consider drawing against another investment as a last-case scenario. You might be able to draw against your life insurance policy, the equity in your home, or your 401(k). Of course, before you go down this road, be sure you have a plan in place to repay this money.

And now for the number-one mistake most people make when trying to consolidate credit card debt: opening a credit card just so you can take advantage of a low interest rate and transfer your debt.

When considering all the tips for credit card consolidation, don’t open a new credit card just to transfer your balance unless you have fewer than five credit cards. Ideally, you should have between three and five credit cards, and the credit-scoring bureaus will deduct points if you have more than five credit cards.

If you do open another credit card, do not transfer the balance until the account has been opened. Often, credit card companies will assign a limit to you based on the balance you transfer. Let’s say they are offering you a low interest rate if you transfer a balance. You fill out the paperwork and indicate that you will transfer $1000. Guess what your limit will be? $1000! This means your balance will be 100 percent of your limit the day you open the account, and this will hurt your credit score.

And finally, the best of all the tips: Create a budget, and stick to it. This might not be the sexiest of all the tips for credit card consolidation, but it works the best!