Is it better to pay off credit cards or get a consolidation loan?
If you're tired of making payments toward credit cards but never making much progress, you might be better off consolidating debt with a personal loan, and then switching to cash or debit cards.
Consolidation has potential downsides, too: Because consolidation can lengthen your repayment period, you'll likely pay more in interest over the long run.
If you do it right, debt consolidation might slightly decrease your score temporarily. The drop will come from a hard inquiry that appears on your credit reports every time you apply for credit. But, according to Experian, the decrease is normally less than 5 points and your score should rebound within a few months.
Debt consolidation is ideal when you are able to receive an interest rate that's lower than the rates you're paying for your current debts. Many lenders allow you to check what rate you'd be approved for without hurting your credit score so you can make sure you're okay with the terms before signing on the dotted line.
However, credit cards and personal loans are considered two separate types of debt when assessing your credit mix, which accounts for 10% of your FICO credit score. So if you consolidate multiple credit card debts into one new personal loan, your credit utilization ratio and credit score could improve.
Success with a consolidation strategy requires the following: Your monthly debt payments (including your rent or mortgage) don't exceed 50% of your monthly gross income.
If a credit card account remains open after you've paid it off through debt consolidation, you can still use it. However, running up another balance could make it difficult to pay off your debt consolidation account.
Taking out a loan to pay off credit card debt may help you pay off debt faster and at a lower interest rate. But you might only qualify for a low interest rate if your credit is good. And personal loans can come with fees that may offset any interest savings.
Do you have to close credit cards after debt consolidation? The short answer is 'no'. Your credit card balance should go down to zero, but your card should remain active and open. If you'd like to close your account at that point, then you can, but there might be benefits to keeping your cards open.
Every lender sets its own guidelines when it comes to minimum credit score requirements for debt consolidation loans. However, it's likely lenders will require a minimum score between 580 and 680.
How long does it take your credit to recover from debt consolidation?
Debt consolidation itself doesn't show up on your credit reports, but any new loans or credit card accounts you open to consolidate your debt will. Most accounts will show up for 10 years after you close them, and any missed payments will show up for seven years from the date you missed the payment.
- Personal Loans. A personal loan is one of the most common methods of merging multiple debts into one. ...
- Home Equity Loans. With a home equity loan, you can borrow against your home's equity and use the money to pay off existing debts. ...
- Balance Transfers.
- Balance transfer credit card. The best balance transfer cards often come with zero interest or a very low interest rate for an introductory period of up to 18 months. ...
- Home equity loan or home equity line of credit (HELOC) ...
- Debt consolidation loan. ...
- Peer-to-peer loan. ...
- Debt management plan.
- Review and revise your budget. ...
- Make more than the minimum payment each month. ...
- Target one debt at a time. ...
- Consolidate credit card debt. ...
- Contact your credit card provider.
- SoFi: Best for fast funding.
- Upgrade: Best for poor or thin credit.
- Achieve: Best for quick approval decisions.
- LendingClub: Best for co-borrowers.
- Discover: Best for excellent credit.
- Happy Money: Best for credit card consolidation.
- LightStream: Best for large loans.
Consolidation combines your loans and may result in a lower monthly payment.
Lenders might not advertise it, but most of them have a minimum credit score required to get a loan. If your score is less than 670, you might be out of luck for a debt consolidation loan. Even if you're over 670, a problematic debt-to-income ratio (more on that below) or payment history could derail your loan.
Federal student loan consolidation
If you consolidate non-Direct Loans into a Direct Loan consolidation, you gain access to protections and benefits available on Direct Loans, such as Public Service Loan Forgiveness (PSLF), which can eliminate the balance of your Direct Loans after 120 qualifying payments (10 years).
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.
Having any credit card debt can be stressful, but $10,000 in credit card debt is a different level of stress. The average credit card interest rate is over 20%, so interest charges alone will take up a large chunk of your payments. On $10,000 in balances, you could end up paying over $2,000 per year in interest.
How to pay off $15,000 in credit card debt?
- Take advantage of debt relief programs.
- Use a home equity loan to cut the cost of interest.
- Use a 401k loan.
- Take advantage of balance transfer credit cards with promotional interest rates.
Will a Debt Consolidation Loan Impact My Ability to Get a Mortgage? Generally speaking, having a debt consolidation loan will not have a negative impact on your ability to refinance your home or obtain a new mortgage. In fact, it may actually improve your ability to qualify.
Debt consolidation is when you move some or all of your existing debt from multiple accounts (such as credit cards and loans) to just one account. To do this you'd pay off – and potentially close – your old accounts with credit from the new one.
The Bottom Line. Using a personal loan to pay off credit card debt can have several benefits. Personal loans typically have lower interest rates than credit cards, which can help you save money on interest charges and pay off your debt more quickly.
The general rule of thumb is that you shouldn't spend more than 10 percent of your take-home income on credit card debt.
