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Credit card consolidation involves combining many liabilities into one, usually by taking out a personal or consolidation loan or by using credit balance transfers to transfer the debt to a low-interest credit card.
How to avoid further debt on credit cards?
Whether you have a consolidation loan or you use balance transfers to consolidate your credit card debt, it’s worth:
- always pay off your credit card debt on time
- destroy the card so you don’t try to use it again
If you still spend money on your credit card, you risk going back to the maximum debt limit and, as a result, increasing your original commitment.
Should I consolidate credit cards?
If you are worried about paying back your growing debt or having a credit card with chronic debt, consider all options and seek advice on debt before you consolidate.
Credit Card Debt Solutions
You should always remember that if you have financial problems, they are unlikely to be solved by consolidating your debts. Moving debt from one place to another is rarely the solution if you can’t afford to pay back the loan anyway.
Issues that may occur when transferring credit card balance
Transferring your credit card balance can help you save money on interest. However, it can also cause credit problems and can cause a transfer failure.
Many credit card issuers offer a balance transfer promotion that will allow you not to pay interest for at least several months. If you pay high interest on one of your credit cards, you can look for opportunities to apply for a balance transfer and transfer your high-interest account to a new supplier.
How is your credit scoring calculated?
Transferring balances can affect your credit standing. First, let’s look at how your credit score is calculated. Your creditworthiness is calculated on the basis of five basic parameters in various proportions:
- Payment History
- Debt level
- Credit Age
- Number of loans
- Recent loan applications
Credit card balance transfers can affect your creditworthiness in terms of debt level, loan age, and current loan applications. This may result in a temporary decrease in the result.
How credit utilization affects card consolidation
Your credit score takes into account credit card balances in relation to their limits – this ratio is known as the degree of credit utilization. It also includes total credit card balances in relation to total limits. This part represents 30% of your credit score. The higher the loan utilization, which means that the higher the balances compared to the credit limit, the lower the credit scoring will be.
If you transfer your balance to a credit card with a lower credit limit than your previous card, your credit usage will increase and you may lose credit points. Fortunately, you can recover lost points by paying off your balance quickly. Ideally, your credit card balance should not exceed 30% of the limit.
Credit card consolidation reduces the credit age
The loan age is a measure of how long you have been using your debit and makes up 15% of your creditworthiness rating. This part of the credit score calculation determines the average length of the credit account and the age of the oldest account. If you remember the definition of average in mathematics, you can find out how opening a new credit card account will lower the average credit age. This is similar to how bad an exam grade would lower your overall grade rating.
Consolidating a credit card into an account that is already open will not hurt your credit age. However, if you open a new credit card, your average credit age will decrease.
The negative impact of credit card balance transfer requests
You probably know that every credit request causes a small loss of creditworthiness. Since recent credit applications represent 10% of your score, applying for a card balance transfer may result in a drop in your rating. The application itself has an influence on the result, not its approval or rejection.
FICO – the creators of widely used creditworthiness research say that queries usually only worsen the credit score by 5 points or less. The rest depends on other information in the credit report. Another good thing is that only the queries from the last 12 months affect the result.
Is credit card consolidation right for you?
The transfer of the balance may affect the credit result, but you can also recover lost points by timely payments, reducing the balance by regular repayments above the minimum and withholding subsequent credit card applications.
However, do not exclude consolidation because of the potential impact on creditworthiness. Also, calculate the profits arising from the transfer of the balance and the cost of not doing so.