Taking a personal loan to clear your high-interest credit card debt can sound simple and easy, but you shouldn’t take that lightly. Repaying debt is as much to do with a change in mindset as it is to change from credit cards to a bank loan. A credit card debt consolidation program comes in handy when you are unable to pay off your debt each month.
The program assists with combining all your credit card debt into one monthly payment. It helps you get out of debt way faster and save money on interest charges, and it may also lower your payable monthly payment. However, debt consolidation may not work in every financial situation since it may make the debt worse. The goal is mainly to reduce or eliminate the interest rate applied to the balance. Here’s what you need to think about first.
The total debt minus mortgage, don’t exceed 40 percent of your gross income
If your total debt exceeds 40 percent of your gross income, the bank finds that you have too many debts on your hands. A credit debt consolidation requires you to borrow an additional loan on top of the one you already have. That may end up overwhelming you, hence making it impossible for you to repay all your monthly payments on time. In the end, the situation will negatively impact your credit score and make it hard to get another loan from any financial institution. While requesting the loan, the bank will add your requested loan to your existing one to see if they exceed 40 percent of your gross income, a process referred to as measuring your Total Debt Service Ratio (TDSR). If the new loan puts you over 40 percent, you should consider taking a smaller loan or no loan at all.
You have a good credit that’s enough to qualify for a low-interest debt consolidation loan or 0% credit card
If you happen to have a good credit score, there are higher chances you will be given a low-interest rate on your debt consolidation loan. You’ll need a credit score over 760 to get to see the lowest interest rates. If you have multiple credit cards with high rates, the interest charges may accumulate, which makes paying off your balance hard. To maintain a good credit score, choose a repayment schedule that is favorable for you. Most financial institutions give borrowers a repayment period of between two and five years to repay their loans. It will suit to make sure the loan has a fixed monthly payment, which ensures it remains constant until the loan is fully paid off. Fortunately, banks today allow you to have a look at your interest rate before you apply for a loan.
Your flow of cash covers payments toward your debt consistently
Before deciding to consider a credit card debt consolidation program, you should have a plan on how to pay it off in a good time. Go through your repayment mode, interest rate, and monthly charges to ensure you can comfortably pay it off. Missing a single payment may lower your credit score, making it hard to apply for a loan in the future. If you suspect that your gross income may be too low to make the monthly payment, it would be wise to extend the repayment period to at least five years.
You have a plan to prevent running up debt again
Taking a personal loan to consolidate debt can be ideal for quite a low amount of consumer debt. If you can manage to pay off your debt in the next five years, consolidating it via a personal loan is a viable option. Credit card debt can be such a hustle to pay off, especially if the defaulted monthly repayments have accumulated over a long period. It’s best if you take a personal loan with favorable repayments terms to avoid penalties and fines for defaulting to pay on time. Since a credit card debt consolidation combines all your personal loans into one, it makes it easier for you to get out of a loan, especially if the terms are favorable. Be sure to plan your finances accordingly to prevent unnecessary loan requisition.