Consolidating Credit Card Debt

Most Americans use credit cards. Too many of us carry credit card debt, unable to pay it off each month. It is easy to get caught in an ongoing circle of debt, where the running balance on the credit card never comes down. If you are paying only your minimum payment or keep charging as much each month as you pay towards the debt, you will end up paying a ton of interest and will never get out of debt.

Credit Card Debt Consolidation

If you want off of the perpetual debt train, a good first step is to reform your spending habits. Many people spend money blindly, not thinking about priorities or plans, but spending as wants and needs arise. A smarter way is to make a budget that takes into account your income, your fixed expenses, your discretionary expenses, and your goals. No matter how expertly you budget your money however, it may not be enough to get you out of debt. It may be necessary to seek some outside help, in order for you to get out of debt and start building wealth.

Credit card debt consolidation can be an important part of the equation to cutting the size of your monthly payments and becoming debt free faster. Bills.com can help you do your credit card debt consolidation research, so you pick the right path to pay down your credit card debt. We can even get you in contact with reputable credit card debt consolidation services, once you decide which method of credit card debt consolidation is best for you. Keep in mind that, in the debt relief industry, “credit card debt consolidation” refers to programs that do not really consolidate your debt. Credit card debt consolidation programs can help you get out of debt and may be the most effective help you can find, but they consolidate your monthly payment, not your debts; your debts remain in the hands of your original creditors.

A great first step for you to take is to check out Debt Coach, a new, free tool that Bills.com introduced to help you find the best way out of debt. Debt Coach tailors a recommendation based on your individual debts, goals, preferences and priorities, offering an easy to understand comparison of the different ways you can become debt free.

You may be able to get out of debt by controlling your spending and following a disciplined strategy for paying down your debts. If you have equity in a home, an excellent credit rating, and a strong debt-to-income ratio, you should look into a cash-out refinance loan to consolidate your debt. If your debt problems are too big to handle on your own, however, you may need to look at a credit card debt consolidation program.

Credit Card Debt Consolidation Help Option #1: Credit Counseling

One option to consider is a Consumer Credit Counseling Service, or CCCS. CCCS companies offer numerous services, such as financial counseling and budget planning, as well as Debt Management Plans (DMPs). In a DMP, the CCCS arranges a new payment amount with each of your creditors, usually based on a reduced interest rate. You then make a single monthly payment to the CCCS which would distribute the funds to your creditors, based on the new payment amounts. There are several drawbacks to CCCS, though. First, depending on your creditors and your current interest rates, it may not be able to reduce eitehr your interest rates or your monthly payments enough to improve your financial situation. Second, it may have a negative impact on your ability to obtain a loan, so you may not wish to enter into a DMP if you anticipate any large purchases, such as home or an auto, in the near future. Third, the average DMP takes around five years to pay off your debts, so you must be willing and able to commit to a long-term repayment plan. Fourth, there is a high dropout rate in credit counseling Debt Management Plan enrollees.

Credit Card Debt Consolidation Help Option #2: Debt Settlement

You may also want to consider the services offered by debt settlement firms. Rather than making monthly payments to your creditors, these programs negotiate lump sum settlements with your creditors, frequently reducing your debts by 50% to 60% of your principal balances. These programs usually take about 3 years to complete. Your monthly payment in a debt settlement program is going to be lower than your regular minimum monthly payment to your creditors, so debt settlement can be the best solution if you cannot keep up with your regular payment or are about to fall behind. That means that debt settlement can get you out of debt at the lowest overall cost and with the lowest monthly payment, while avoiding bankruptcy.

The major drawback to debt settlement programs is the harm they do to your credit rating, although that is not as important if you already have damaged your credit. You will also be exposed to your creditor's collection efforts, including collection letters, phone calls, and possible lawsuits. However, if you are currently unable to afford to pay your creditors, any negatives of debt settlement may be outweighed by the benefit of ridding yourself of credit card debt.

Credit Card Debt Consolidation Help Option #3: Bankruptcy

Bankruptcy may also solve your debt problems, but is a very different form of debt help (and not really considered debt consolidation). A Chapter 7 bankruptcy is a liquidation of assets and liabilities, and is usually considered a last resort. Since bankruptcy reform went into effect, it is much harder to qualify for Chapter 7 bankruptcy, and many families are forced to file for Chapter 13 bankruptcy where you repay a portion of your debts over an approximately five year period. If you are considering bankruptcy, you should always meet with a qualified bankruptcy attorney in your area.

Summary: Which Credit Card Debt Consolidation Option is Best for You?

The credit card debt consolidation option that will work for you depends on your personal situation, such as the amount of debt you have, your current credit rating and its importance to you, and whether or not you have equity in a home. If you have equity in your home, using your equity to consolidate your debt with a refinance loan might be a good idea, allowing you to lower your monthly payment while getting away from the high interest you may be paying your creditors. If you are unable to get an acceptable loan, options such as debt settlement or credit counseling could be the way to go. Bankruptcy should be an option of last resort.

Lastly, here are some fast tips for your own quick Debt Consolidation Evaluator:

1. If you have perfect credit and have equity in your home — consider a Mortgage Refinance.
2. If you can afford a healthy monthly payment (about 3% of your total debt each month) and you want to protect yourself from collection and from going delinquent — consider Credit Counseling.
3. If you want the lowest monthly payment and want to get debt free for a low cost and short amount of time, AND you are willing to deal with adverse credit impacts and collections — then evaluate Debt Settlement.
4. If you cannot afford anything in a monthly payment (less than 1.5% of your total debt each month) — consider Bankruptcy, to see if Chapter 7 might be right for you.

Bills.com makes it easy for you to apply for debt relief with pre-screened debt relief providers. If you want to see a very innovative side-by-side comparison, including a chart comparing payments,total cost estimates, projections on the time it takes to achieve debt freedom, as well as thre chances for success in different debt relief approaches, then check out our recently published Debt Options white paper.