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How to Consolidate Credit Cards?

If you think you need to consolidate credit cards, be sure to review the terms, conditions and interest rates being charged on each credit card. There are two ways to do this; the first is a new loan or line of credit, or balance transfer. The second is a debt consolidation or debt management plan offered by non-profit agencies.

Obtaining a new ďunsecuredĒ loan to consolidate credit cards may prove difficult depending on your situation. Lenders look at your credit score and debt to income ratio. If your credit score is outside the lenders guidelines, you will not be approved. Your credit score will need to be 680 or above to be approved by most lenders. Lenders typically donít publish their credit score requirements, however if you do a little research you should be able to find the lenders requirements on-line. Sites like Nerd Wallet & Delraycc.com and many others will show the score requirements of some lenders. You can also ask the lender what the score requirement is. Most will not give you a definitive answer; however, if you go into a bank or lenders branch location & speak to a loan officer advising them of what your situation and needs are, they will likely tell you if youíre in the ďball-parkĒ of their requirements.

Make sure you know your credit score, (all 3 scores) before applying for a new loan. There is no point in applying for a loan if your score or income is not within the lenders guidelines. You can obtain your credit score thru MyFico.com. Many lenders use your FICO score when processing a loan application, but FICO IS NOT THE ONLY SCORE a lender may use. The Huffington Post reported on a government study found 49 different scoring models a lender may use. Not all credit scores are the same; Transunion for example has their own ďconsumer versionĒ credit score product. Some lenders are using Vantage Score.

Vantage Score has a model that in part combines all three scores, designed for greater accuracy for lenders. Some savvy lenders have their own custom credit scoring system. In the same Huffington Post article they report that the same government study found all the different scoring models were in range of FICO score 73-80% of the time.

There are lenders that do not use credit scores with every loan application. According to Forbes, Lenders have come up with new ways of evaluating a consumer loan application in large part to open up lending to millennials (Under 30 Years of Age) Forbes reports that every one third of people under 30 years of age donít have a credit card, and little to no information is being reported to the credit bureaus. Lenders are now looking at what college, course of study, employment and income when processing applications for millennials, instead of focusing so much on the credit score.

In any event, step one is to check your score, know what it is before you apply for a new loan.

Your next step before you apply is to do a budget. This will help determine your DTI. Your DTI or Debt to Income ratio is the second most important thing lenders look at. Itís important to know that lenders look at your income & revolving monthly expenses to determine your DTI. Make sure you list all your income. If you have a second job or rent a room in your home, thatís all income. Be sure to include it. Your revolving monthly expenses should be showing on your credit report. (Mortgage/rent, car payments, credit card minimums, school loans)

Make sure you to list all monthly expenses on your budget sheet, this is not for the lender, this is for you. You need to know exactly how much you are paying out every month. Things like prescription drugs, gym membershipsí and childcare are just a few things that a lender wonít see as revolving monthly expenses. But you need to know exactly what your expenses are. Knowledge is power. Donít except a new loan if you donít think you can keep up with the payments.

If you are able to get a loan to credit card consolidation, and other unsecured debt be careful not to run up the balances on the credit cards again once you pay them off with a new loan. This is a trap that too many people have fallen in to.

The fact is that if your credit cards are maxed out, you are unlikely to be approved for a new loan. Thatís due to second biggest factor in determining a credit score, which is the use of available credit. It accounts for 30% of your credit score. If you have low balances (under 30% of the available credit line) you would score well in this area, however once your balances start to rise over 30% your score will lower. If your balances are maxed out, this can severely affect your credit score. Even if youíre approved for a loan, you may end up with a much higher interest. If youíre offered a high interest rate loan to pay off credit cards, donít accept it. Itís not doing you any good.

If a new loan is out of reach or the terms of a loan donít make sense, then consider debt consolidation or debt management plan (DMP) thru a non-profit agency. You can obtain for credit card consolidation in a debt management plan that will reduce or eliminate high interest rates, and stop the fees. (Over-limit & late fees) Your overall monthly payment may be lower and youíre going to get out debt way faster than paying just the minimums on your credit cards. DMPís typically have people debt free in 3-4 years or so, as opposed to the 20-25 years or more making minimum payments on credit cards.

This approach isnít perfect, there is a down side, and that is that you cannot make further charges on the accounts included. They will be closed. Be sure to leave one credit card out of the DMP if possible. It is important to know that your bank or credit grantor extends all the benefits of these plans. If you pay on-time many banks and credit grantors will re-open accounts once youíve completed the plan. You can get help by filling this form.

Another possible option is to opt for credit card consolidation on your own, DIY. Use some of the same techniques as the non-profits agencies use with Debt Management Plans. First do a budget, see where you are. If you need to cut expenses, do it. You want to able to pay more than the minimums each month. Follow these steps;

  • Add up total credit card minimum payments. If you have 4 cards each with a $25 payment, thatís $100.00. Add 20% to the total minimum payment, in this case $20.00 for a total of $120 per month. Use the 20% (in this case $20.00) & pay it to the highest interest rate credit card. Keep making the same payment of $120.00 towards the credit cards. When the first card in your DIY debt consolidation is paid in full, allocate the funds you were paying toward the account that is paid in full toward another card. DONíT LOWER THE TOTAL AMOUNT YOUíRE PAYING EACH MONTH. (In this example $120.00) This is the real secret to a successful DIY debt consolidation. If you do this you are using the ďaccelerated payoff componentĒ Credit Card companies keep people in debt so long because as minimum payments are paid, & balances reduce, they lower your minimum payment.
  • Stop Charging! Youíre going to have to stop charging on the accounts, live within your budget. Only use a credit card for emergencies.

If you follow those two steps, you will likely be out of debt faster than you thought possible.


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