Holding large amounts of debt across multiple credit cards can be a costly endeavor. With recent estimates claiming that the average credit card APR rate in the US now stands at between 17.03% to 24.05% – the monthly interest payments alone can leave you in financial distress.
However, the good news for you is that there is a simple way to consolidate all of your outstanding balances on to a single card. Most importantly – you can stop paying interest, period. In order to achieve this goal, you simply need to obtain a 0% balance transfer card that allows you to pay-off your outstanding credit card debts.
If you’re keen to stop handing over your hard-earned money to cover your monthly interest payments, be sure to read our comprehensive guide on the Best Credit Card Consolidation Providers in 2019.
Why consider credit card consolidation?
If you are yet to engage in a credit card debt consolidation program, it is important to ensure that you have a firm as to how the process actually works. First and foremost, we will make the assumption that you are currently holding outstanding debts on one or more credit card.
In fact, if you’ve got multiple credit cards, then you’ll know that trying to keep on top of your monthly payments can be a logistical nightmare. Furthermore, as credit card debt is one of the most expensive forms of financing, you’re likely being hit with super high-interest payments every month.
With that being said, a credit card consolidation exercise seeks to make your life easier – both in terms of meeting your monthly payments and reducing your debt interest obligations. Here’s a quick example of why you might need to arrange debt consolidation on your credit cards.
- You currently hold four credit cards, with each card maxed out with debts of $5,000.
- As such, your total outstanding balance is $20,000.
- To keep things simple, let’s say that each card comes with an APR rate of 20%.
- If you were to just pay the minimum each month, you would effectively be paying $2,232.28 in annual interest – which is huge.
- Moreover, as your four credit cards come with a different repayment date throughout the month, you often find yourself missing a payment.
As you’ll see from the above example, having a number of outstanding credit cards can be a very costly endeavor. Moreover, by having multiple repayment dates throughout the month, you stand a very realistic chance of missing a payment, which will, of course, lead to further financial complications.
How does credit card consolidation work?
So now that you know why you should consider engaging in a credit card debt consolidation program, let’s explore how the process actually works. Sticking with the same example as above, let’s see how a newly obtained 0% balance transfer credit card can provide a simple, yet highly effective solution to your interest-bearing woes.
- As noted above, you currently have $20,000 in outstanding balances across 4 credit cards, all of which come with an APR rate of 20%.
- As such, you take out a new credit card that comes with a 0% balance transfer offer for 18 months.
- Once approved, you proceed to use your new card to pay off your entire $20,000 credit card balance. Great!
- You now owe $20,000 on your newly obtained credit card.
- This means that as long as you always meet your minimum monthly payment, you effectively have 18 months to repay the $20,000 debt without paying any interest whatsoever.
As you’ll see from the above example, the balance transfer process operates in a similar way to a loan, insofar that you can split the $20,000 debt across the full 18 months. As such, by paying $1,111.11 each and every month, you’ll be debt-free without having paid a single cent in interest!
Am I better obtaining a consolidation loan?
If you’re yet to proceed with your debt consolidation plan, you might be wondering whether or not you’re better off obtaining a loan. The simple answer to this is no. The overarching reason is that loans will always come with interest, as there is no such thing as a ‘0% loan’.
This wouldn’t make financial sense for the lender, as they would be risking their money without making a return. On the contrary, credit card providers do this in the hope that you will continue using the card once the 0% introductory period expires.
However, it is crucial to note that in certain instances, you might have no option but to instead consider a debt consolidation loan. Here’s why.
🚫 Size of your debt:
The first barrier that might prevent you from facilitating your credit card consolidation plan is the size of your debt. In a nutshell, credit cards typically come with much lower credit limits in comparison to traditional loans. As such, you might not be able to obtain a credit card with a high enough balance to clear all of your outstanding credit cards.
For example, let’s say that you currently have $15,000 in outstanding balances, across three individual credit cards. However, if you are only able to obtain a 0% balance transfer credit card with a $5,000 limit, then you won’t have enough to meet your goal. In this instance, you might need to consider a consolidation loan to make up the difference.
🚫 Credit rating: In the vast majority of cases, the very best 0% balance transfer credit cards are only available to those with good and excellent credit. The reason for this is that in reality, the credit card provider won’t make any money from a 0% interest introductory offer unless the customer makes purchases on the card, or doesn’t pay off the balance in full before the offer expires.
As such, they are reluctant to offer such a service to those with bad credit. If this is the case, then you will instead need to consider a specialist loan provider.
Criteria used to rank the best credit cards
❓ We only list providers that offer 0% interest for 14 months or more
❓ We only list providers that offer credit limits of $5,000 or more
❓ We only list providers that are regulated and well-established
❓ We only list providers that offer a reasonable standard APR rate
❓ We only list providers with a balance transfer fee of 5% or below
Credit card consolidation is the process of paying off your outstanding credit card balances and moving the debt to a new 0% interest credit card. Not only does this allow you to avoid paying any interest on your debts for a set period of time, but you can also avoid the process of making multiple repayments throughout the month.
The standard online application process will allow you to check whether or not you are eligible via a soft inquiry. Moreover, the soft inquiry will usually allow you to view your pre-approval rates. It is only when you proceed with your pre-approval offer that the application will be reported to the main three credit rating agencies.
The minimum eligibility requirements will vary depending on the specific credit card issuer. However, if you are looking to obtain a 0% balance transfer card to consolidate your debts, then you can be certain that you’ll need to have at least a ‘Good’ FICO score. Ultimately the best credit card products are typically reserved for those with an excellent credit profile.
You should always opt for a 0% credit card if you are looking to consolidate your credit card debts, as you will have the opportunity to repay your balances without paying interest. However, if the size of your balances is too high, and/or you don’t have a reasonably good credit profile, you might need to consider a loan instead.
While some credit card companies will allow you to make your balance transfers for free, others will charge you a percentage of the amount you transfer. This typically averages 3%, although it can be as high as 5%.
Don’t panic, as you can simply repeat the same process detailed within this guide. For example, if you’ve still got $4,000 on your current credit card, but the 0% period is about to pass, then you can simply apply for a new 0% balance transfer card. Once you transfer the balance over, you should be able to get yourself at least another 14 months.