How to Use Credit Cards to Consolidate Debt

Posted by Jill on August 9, 2011

Getting out of debt is not an easy task – first, you have to make the commitment to stop incurring new debt. Then, you need to create a plan to pay off existing debts in some logical order. This all assumes that you have the income to cover your expenses, and the willpower to keep your expenses to needs and not much else – except, of course, debt payments.

One possible way to ease the burden of your debt repayment plan is to consolidate some or all of your debts. You can do this using a bank consolidation loan or another credit card. Some people argue that this is counterproductive – and it can be, if you don’t do it the right way. If you stay committed though, consolidating debt using one or more credit cards can ultimately be your ticket to a debt-free life.

What is consolidation?

Consolidation is the practice of taking out a loan to pay off existing debts, thus combining some or all of your debts into one large debt. By doing this, you have one loan that allows you to make one monthly payment and incur one interest rate. Rather than trying to figure out which card you should pay off first (lowest balance? highest interest? something else?), you can pay them all off up front and then just concentrate on paying down the consolidation loan.

How do credit cards help?

If you’ve read My Dollar Plan for any length of time, you know that Madison is a huge fan of the balance transfer. Balance transfers allow you to literally transfer the balance from one credit card to another, potentially saving hundreds of dollars in the process.

Successful Consolidation

If you’re interested in combining your monthly payments and potentially lowering your overall interest in the process, follow these simple steps:

  1. Shop around for a good offer. We keep a list of active balance transfer offers. Look for one with an interest rate lower than your current credit card rates and a low (or zero, though those are harder to come by these days) balance transfer fee. The best offers are those that keep the transfer rate good for the life of the loan. But at the very least you want a low rate that will last for at least a year (the 21 month balance transfers are currently some of the longest), to give you time to pay it off or at least significantly down.
  2. Decide which credit card balances to transfer. Your credit limit on the new card may prevent you from consolidating all of your debt at the same time. Mathematically, you should transfer the balances with the highest limits to pay the lowest interest in the long run. But if you want to get rid of more payments, transferring the lowest balances will allow you to consolidate more debts. If your rate on the consolidation card will go up after a year or some other length of time, make sure you are only transferring balances that have a rate higher than the final consolidation rate – otherwise you’re not really saving money.
  3. Stop incurring new debt. Once the balances have been transferred, STOP USING THE OLD CARDS. This is key. If you keep using the old cards, you will be in a much, much worse position than before, since you’ve basically doubled your available credit. The reason most people decide to consolidate is because they can’t manage multiple payments on high-interest and high-balance debts. If you consolidate and then rack the debt back up, your payment situation will be even more dire. If you can’t make the commitment to stop using credit cards, a consolidation loan of any kind is not for you.
  4. Pay other credit cards down. Once your consolidation is done, you can really speed up debt repayment. Your payment on the new card will most likely be lower than the total of all the minimum payments on all the balances you transferred. Since your new consolidation card will now have the highest balance AND lowest interest rate, it should be at the bottom of your debt repayment priority. Use any extra cash from minimum payments as well as other income sources to pay down any remaining debts.
  5. Pay the consolidation card down. Once your other debts are paid off, you can hit the consolidation card hard. Throw all debt repayment money at it until it’s paid down. As stated above, you should most likely pay off any remaining debts first. However if the interest rate on this card will spike after 12 months or some other term, pay as much extra as you can to this card during that term – even if it means paying only minimum payments on other debts.
  6. Repeat as necessary. If you find a couple of particularly good balance transfers at once, and have a lot of debts, you may need two or more cards to consolidate all of your debt. If you haven’t finished paying off the consolidation card at the time the favorable terms expire, you might want to further roll the remaining debt, as well as any debts that you didn’t consolidate the first time, onto another card with a good balance transfer offer. Don’t look at this step as an invitation to get back into debt and then do the whole process over – but do look at it as a tool to continue helping you get out of debt in the fastest amount of time possible.

0% Balance Transfer Cards for Consolidation

If you are considering consolidating your debt with credit cards, here are some of the longest zero percent balance transfer offers from each of the credit card issuers. Just make sure to check the list of balance transfer fees with each offer:

If you're looking for a new credit card, be sure to check out our credit card directory!

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