Credit cards and overdrafts are exorbitant. They soon exhaust your income because a large proportion of money goes towards interest payments. Since the balance does not go down quickly, you find yourself being trapped in credit card debt and overdrafts. Try to cut the interest payment in order to discharge them sooner rather than later. The most popular methods to reduce interest payments include a 0% balance transfer credit card and a debt consolidation loan.
When you struggle to handle the debt, you are required to make minimum payments. Interest keeps accruing on the unpaid amount, which continues to mushroom. Consequently, you never become able to get out of debt. However, if you cannot make minimum payments, you should consider taking advice from a debt counsellor because neither of the aforementioned options will work for you.
It is vital to have a stellar credit score
Before you consider any of these options, you must assess how good your credit rating is. It is not staggering that getting approval for a loan is easier when you do not actually need money. People with good credit scores are able to reduce interest rates as both of the above options are aimed at them. Unfortunately, your credit score cannot be perfect if you are struggling to pay off the debt. You might have been behind on a couple of payments that have led you to this decision.
You should be active. Before it is too late, consider these options. The first thing to do is check your credit file. Do not be afraid of a poor credit rating. You can improve it. If you try to consolidate your loans with a bad credit rating, your chances of being approbated are very slim. You will most likely be repudiated, and it would further ding your credit rating.
Of course, it would take time to improve your credit score. What do you need to do for that? Try to clear the balance faster and stop using your credit card. There is no point in adding credit card debt when you are already struggling to discharge the balance.
If your credit report has some inquiries and missed payments that are very old, you might wait until they disappear from your credit report as they have not been there for more than six years. Your credit score should be at least fair if you want to apply for the following two options.
- 0% balance transfer cards
If your credit score is good, you must be able to apply for a 0% balance transfer card. These cards will transfer your current outstanding credit card balance to a new one, which you pay down over a period of time called an interest-free period. However, you will have to pay up to 5% of the total balance as fees. These cards seem very convenient, but they are not, even though your credit rating is good.
- First off, you will find a few credit card providers providing balance transfer cards. Secondly, it is harder to get a large limit. The credit card company will cap the balance amount you can transfer.
- It is worth noting that a 0% interest-free deal lasts for a limited period of time. If you fail to discharge the debt within such a time period, you will end up being charged a lot more interest.
- Every credit provider charges different fees. The fees may vary between 3% and 5%. You should always do research and try to choose a lower fee. It is vital to save money.
- It is essential to make minimum payments when you struggle financially. Missing one payment would result in the suspension of a 0% deal. Your contract will disclose the minimum payment.
- You should not use these cards to make new purchases because they are never covered under a 0% deal.
A 0% balance transfer deal appeals to most borrowers who want to get rid of credit card debt faster, but studies have revealed the contrary. More than 40% of people fail to clear their debt within the interest-free period. 20% of people end up with more credit card debt than they had at the beginning. Before you jump, be careful about your repaying capacity.
- Consolidation debt
If you have unpaid balances on multiple credit cards and they are becoming difficult to discharge, you can think of taking out a personal loan to consolidate all of them. While this would make it easier for you to manage payments, many people still struggle because of high interest rates.
Research has revealed that many people fall behind on payments because they do not change their spending behaviour. So, this cannot be a good solution if you cannot maintain discipline.
Make sure that you do not make the following mistakes after consolidating your debts:
- You do not close down your credit card that you have cleared. This will keep prompting you to use them, and again, you will find yourself in credit card debt. Henceforth, you should keep only one card with a reduced limit. Use it for small purchases and pay off in fell one swoop.
- If overspending is the cause of debt, focus on it. There is no point in qualifying for lower interest rates if you do not turn over a new leaf.
- Do not borrow more than you need. Larger borrowing will make it hard for you to tackle payments because the interest amounts will increase, and so will monthly instalments.
Credit card debt consolidation is implausible to qualify without a good credit rating. You should fix your credit rating first or consider this alternative before your credit rating becomes worse after missing a payment.
The final word
Credit card debt is expensive. Experts enjoin that you use them for smaller purchases and clear the balance in full. In fact, minimum payments will never help you because interest will keep accruing on the unpaid balance. You can deal with your credit card debt by either 0% balance transfer or consolidation.
Both options are suitable for good credit borrowers. It means you should consider them before falling behind on the payment.
