How Should I Consolidate My Credit Cards
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One of the most common New Year’s resolutions is to get your finances in order. If you have balances spread across multiple credit cards, you may want to consider consolidating these balances. You have a number of options at your disposal, but you will want to consider the credit risk of each.
Transfer Balances to a Card You Already Have
The easiest way to consolidate is to transfer all of your balances to a credit card that you already have. This could be an exceptional option if your credit card is offering you a 0% APR on balance transfers. Be aware that the 0% interest is generally only applicable for an introductory period, usually ranging from 6 to 18 months. If you can pay off the debt in its entirety in this time period, you can save yourself money in interest costs.
Before you initiate the transfer, make sure your credit limit is high enough to transfer all of your debt AND pay any balance transfer fees. Most credit card companies will charge a balance transfer fee when you move debt from another credit card. For example, the Citi Diamond Preferred Card has an incredibly attractive 21 month balance transfer offer and charges 3% on each balance transfer, or at least $5. Check the terms and conditions of your credit card to see the balance transfer fee, and add this to the amount you want to transfer to make sure you have an adequate credit limit.
When you consolidate credit this way, the effect on your credit score should be minimal. Since the credit card is already open, you will not take a hit for a hard credit inquiry or opening a new account.
Additionally, as long as you keep all of your credit cards open, this should not affect your credit utilization, as you will not be changing your debt-to-credit ratio by very much, unless you are transferring a large balance and incur a significant balance transfer fee.
Opening a New Card to Transfer the Balance
Transferring your balances to a new credit card works about the same as transferring your balances to an existing card. Make sure the new card will offer a high enough limit to cover your balances and any transfer fees.
The main difference is the effect opening a new account will have on your credit score. When you apply for a new credit card, a hard inquiry will appear on your account. Additionally, when you open a new account, it lowers the average age of your credit history. New credit inquiries and age of accounts both make up 10% of your credit score. Thus, your credit score could take a slight hit, especially if you have applied for several accounts in a short period of time.
That being said, a new credit card could also boost your score. When you open a new account, you will have more available credit available, which means you will be using a lower percentage of your available credit (as long as you don’t close your other cards). Credit utilization accounts for 30% of your credit score. In fact, it is the second most important aspect of your credit history (behind only payment history). Ideally, you will use no more than 30% of your available credit, so if opening a new credit card drops your total debt below 30% of your available credit, your score could increase.
Debt Consolidation Loans
A final option available to you is to find a debt consolidation loan. With a debt consolidation loan, you can lump all of your unsecured debt, including credit cards, medical expenses, payday and personal loans and utility bills into one account. Debt consolidation loans can be good, if they have a low interest rates and provide fixed rates, so you will always know what your payment will be. On the downside, if you have bad credit, it may be difficult to find a loan, and the monthly payments are generally high since the length of the loan is a shorter time period. LendingTree is one of many reputable organizations that can help determine whether a debt consolidation loan could work for you.
When you take out a debt consolidation loan, the effect on your credit is similar to opening a new credit card. Your credit will take a slight hit due to the credit inquiry and new account, but it could also increase if if lowers your credit utilization below 30%.
Before You Consolidate Your Debt
No matter how you decide to consolidate your debt, you will want to make sure that you will save money. While it may be more convenient to pay just one bill each month, transferring balances could end up costing you money if the balance transfer fees are high, and if the credit card or loan is not offering an interest rate substantially lower than the rate on your other cards. An online calculator can help you determine whether transferring balances will save you money.