Debt Consolidation Versus Credit Card Consolidation

Credit card consolidation is just one form of debt consolidation. You can consolidate credit card debt in one of three ways: through a balance transfer, a debt consolidation loan or a debt management program. Which method you choose ultimately depends on your credit score, how much in credit card debt you have and how much you can afford to pay each month. You may consider credit card consolidation if the only debt you have is of the plastic variety.

Debt Consolidation
Happy debt free woman in glasses holding a credit card cut in two pieces

What Is Debt Consolidation, and Why Is It Helpful?

Debt consolidation refers to the process of combining debts from multiple sources, such as credit cards, auto loans, personal loans and payday loans, into a single debt. While it may seem counterproductive to accrue more debt to get out of debt, there are actually several benefits to doing just that. One major benefit is the reduced interest.

Regardless of the debt consolidation method you choose to use, if you carry debt on multiple credit cards, you can save money in interest by combining all the debts into one. For instance, say you have a card with a 15% APR and an average outstanding balance of $1,500, a second card with an 18% APR and an average outstanding balance of $2,000 and a third with a 24% APR and an average outstanding balance of $850. For every day your cards carry a balance, you will pay 0.00041%, 0.00049% and 0.00066% on the outstanding balances. During a 30-day billing cycle, that amounts to $18.60 on card one, $29.40 on card two and $16.80 on card three, in interest alone. That adds up to $64.80 in credit card interest each month.

Now, say you were to consolidate your debt via balance transfer or a personal loan. You would only have to pay one interest rate or, in the best-case scenario, $0 in interest. Through consolidation, you can save hundreds of dollars in interest alone.

In addition to the cost savings debt consolidation offers, it can also help to lower your monthly payments and more quickly pay off your debt. If you have several credit cards, it can also eliminate the hassle of trying to make timely payments to multiple companies.

How Does Debt Consolidation Work in Canada?

You can consolidate debt through one of three methods in Canada: a personal loan, balance transfer or debt management. If you take out a personal loan, you would use the sum to pay off one, several or all of your credit cards. You would then make monthly payments to the lender from which you borrowed the loan.

If you go the balance transfer route, you would transfer the balances on each of your cards to a single, low- or no-interest card. You would then pay down the balance on the new card.

If you choose debt management, the debt management firm would negotiate with your creditors for lower monthly payments and reduced interest. You would then make a single payment to the company, which would pay each of your creditors the agreed-upon monthly amount.

How Does Debt Consolidation Affect Your Credit Score?

How debt consolidation affects your credit score depends on your commitment to becoming debt free. If you’re serious about getting out of debt, and if you alter your spending habits to reflect that, debt consolidation can help you work toward a better score. However, if you take out a personal loan or use a balance transfer card only to free up credit that you continue to use, debt consolidation will only do more harm than good.

Can Debt Consolidation Help Your Credit Score?

Again, it all depends on your commitment to getting out of debt and whether or not you stick to your resolve to curb your spending. If you take out a personal loan or use a balance transfer card, your credit score will see an immediate boost because your credit utilization rate will go down. A personal loan can also help to diversify your debt, which the credit bureaus love to see. Making timely monthly payments and refraining from using your now balance-free cards can further boost your score.

What Do Debt Consolidation Companies Do?

Debt consolidation companies, otherwise known as debt management firms, take over the management of your debt. Upon joining a program, the company will negotiate with your creditors to reduce the amount you owe each month. Many times, it’s successful in eliminating interest, reducing monthly payment amounts or both. Once the negotiations are over, the company will tally up the agreed-upon amounts. You will pay the monthly total to the debt management firm, which will then disburse payments to your creditors on your behalf. In exchange for the company’s services, you would pay a small fee to the firm each month.

Why Get Debt Consolidation?

Debt consolidation is a great option for individuals who are in over their heads with debt and/or who struggle to manage multiple debts. For those who are serious about becoming debt free, debt consolidation is a great way to do so. If you’re interested in debt consolidation, find the most competitive offers that suit your needs within a matter of minutes. Use LoanConnect’s personal loan search engine today.


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