By: William Jones

Many Americans are facing challenges with credit card debt, but this situation does not have to persist. You do have options, and one of those is “debt consolidation.” Debt consolidation may be something you have heard of, but we will explore it in more detail today. After reading this article, you may gain a better understanding of why staying in your current situation could prolong debt repayment and how you could choose a potentially better path.

Why Credit Card Debt Is So Hard to Recover From

Credit card debt can be particularly challenging to recover from because of the high interest rates associated with credit cards. For example, the average credit card interest rate is around 22%. If you are only making the minimum payments each month, this interest rate may cause your balance to increase significantly. On top of that, the balance is likely compounding.

The second issue is the minimum monthly payment. A large portion of a minimum monthly payment goes toward interest, so it may barely reduce the principal.

An Example

Suppose that Jen has an $8,000 balance on a credit card with a 22% interest rate. The minimum payment is 2% of the balance, which is $160 per month. If Jen continues making the minimum payments, it is possible she could take approximately 30 years to repay her debt, paying potentially $40,000 in interest.

What Is Debt Consolidation?

Debt consolidation is one potential option that could allow you to pay off all of your debts with one loan or a credit card. The loan or credit card might have a lower interest rate than 22%, offering you lower payments over a potentially shorter period of time. In the process, you would combine all of your debts so that you are only paying off one large loan. Along with being potentially less costly and time-consuming, it could simplify your life because you would be making just one payment.

How Does Debt Consolidation Work?

Rather than paying all of your debts individually, you could take out a loan that allows you to pay the entire balance all at once. If you receive a loan, you or your lender would pay all of your credit card balances in full.

If you qualify for a balance transfer credit card, you could transfer the balances from your high-interest credit cards to a lower-interest credit card. Then, you would make lower payments in less time.

Ways to Address Credit Card Debt

Track Your Monthly Budget.

Determine how much money you earn each month after taxes. You have the option of choosing one of several budgeting apps that could help you track your monthly expenses.

Create a Plan.

Make a list of your monthly expenses, and separate your needs from your wants. You will need to prioritize your needs. Determine where you could save money. For example, cancel subscriptions you don’t need, and consider going out to eat less often.

Pay More than the Minimum Payment.

In the scenario above, if you were to pay $250 per month rather than the minimum $160, you could pay off your debt in approximately four years. The interest paid would likely be $4,100, so this is a significant improvement.

Be Wary of Buy Now, Pay Later Purchases.

Buy Now, Pay Later programs might encourage you to spend money you do not have, and they can come with interest rates that may be higher than the interest rates on credit cards.

Consider a Debt Consolidation Program.

You have several debt consolidation options to consider, and one is to apply for a personal loan. This could be a good option if your credit scores are good or excellent.

If you have sufficient equity in your home, you may qualify for a home equity line of credit or HELOC. A HELOC typically has low interest rates if you qualify.

Is Debt Consolidation a Good Idea?

Debt consolidation may be a good idea when you combine your debts into one, but the monthly payments must be manageable for you. While you are repaying your debt, it is important to take the opportunity to change your spending habits. This could help prevent the same situation from recurring in the future.

Disclaimer: The information provided in this article is for general informational purposes only and is not intended as financial advice. The strategies discussed may not be suitable for everyone, and readers should consider consulting a financial professional for advice tailored to their specific situation.