Tag Archive Credit Card Debt

ByCurtis Watts

How to Get Debt Consolidation Loans When You Have Bad Credit

Debt consolidation is one of the most effective ways to effectively manage debt. It can greatly improve your debt-to-income ratio and help you get back on your feet. You will have more money in your pocket and less debt to worry about, and while your options are a little more limited if you have bad credit, you can still get a consolidation loan.

In this guide, we’ll look at the ways that a debt consolidation loan will impact your credit score, while also showing you the best ways to consolidate credit card payments and find a credit card consolidation plan that suits your needs.

What is a Debt Consolidation Loan and How Does it Work?

A debt consolidation loan can help you to manage credit card debt and other unsecured debts by consolidating them into one, manageable monthly payment. You get a large loan and use this to clear all your current debts, swapping several high-interest debts for one low-interest loan.

You’ll consolidate multiple payments into a single monthly payment, and, in most cases, this will be much less than what you’re paying right now.

The problem is, creditors aren’t in the business of helping you during your time of need. They’re there to make money, and in exchange for your reduced monthly payment, you’ll get a loan that extends your debt by several years. So, while you may pay a few hundred dollars less per month, you could pay several thousand dollars more over the lifetime of the loan.

Why Consider Debt Consolidation for Bad Credit?

You can use a debt consolidation loan to consolidate credit card debt, clear your obligations, reduce the risk of penalties and fees, and ultimately improve your credit score. What’s more, you may still be accepted for a debt consolidation loan even if you have a poor credit score and a credit report with several derogatory marks.

It’s an option that was tailormade for borrowers with lots of unsecured debt, and it stands to reason that anyone with a lot of debt will have a reduced credit score. Of course, it still helps if you have a high credit score as that will increase your chances of getting a low-interest debt consolidation loan, but even with bad credit, you can get a loan that will reduce your monthly payment.

How Does Debt Consolidation Affect Your Credit Score?

A debt consolidation loan can impact your credit score in a number of ways, all of which will depend on what option you choose:

  • A balance transfer can reduce your score temporarily due to the maxed-out credit card and a new account.
  • If you use a consolidation loan to clear credit card balances, you will diversify your credit report, which can benefit up to 10% of your credit score.
  • If you continue to use your credit cards after clearing them, your credit utilization will drop, and your credit score will suffer.
  • A new consolidation loan account will reduce your credit score because it’s a new account and because the average age of your accounts has decreased.
  • Debt management will reduce your credit utilization score by requiring you to cancel credit cards. This accounts for 30% of your total credit score. 

The good news is that all of these are minor, and the short-term reductions should offset in the long-term. After all, you’re clearing multiple debts, and that can only be a good thing. 

A debt consolidation loan will not impact your score in the same way as debt settlement or bankruptcy.

Alternatives to a Debt Consolidation Loan 

A debt consolidation loan isn’t your only option for escaping debt. There are numerous options for bad credit and good credit, all of which work in a similar way to a debt consolidation loan.

These may be preferable to working with a consolidation loan company, especially if you have a lot of unpaid credit card balances or you’re suffering from financial hardship.

How Does a Debt Management Program Work?

Debt management is provided by credit unions and credit counseling agencies and offered to individuals suffering financial hardship and struggling to repay their debts. A debt management plan typically lasts three to five years and works with unsecured debt only, which includes medical debt, private student loans, and credit cards, but not mortgages or car loans.

A debt management plan ties you to a credit counseling agency, which acts as the middleman between you and your creditors. The agency will help to find a monthly payment you can afford and then negotiate with your creditors. You make your monthly payment through the debt management program and they distribute this to your creditors.

Debt management specialists are experts in negotiation and know how to get creditors to bend to their ways. They understand that lenders just want their money and are keen to avoid defaults and collections, so they remind them that failing to negotiate may increase the risk of such outcomes.

Debt management programs are not free. You will be charged a small up-front fee in addition to a monthly fee. However, the amount of time and money they save you is often worth the small charge.

The only real downsides to a debt management plan is that you’ll be required to cancel most of your credit cards, which will impact your credit score, and if you miss a single payment then creditors will revert to previous terms and your progression will be lost.

A Balance Transfer

You don’t need a debt consolidation loan to consolidate your debt. You can also use something known as a balance transfer credit card. 

A balance transfer allows you to consolidate credit card debt onto a single card. These cards offer you 0% interest for up to 18 months and allow you to transfer multiple credit card balances.

As an example, let’s assume that you have the following credit card balances:

  • Card 1 = $5,000
  • Card 2 = $2,000
  • Card 3 = $3,000
  • Card 4 = $5,000

That gives you a total credit card balance of $15,000. If we assume an APR of 20% and a minimum payment of $500, you will repay over $20,000 in 42 months, with close to $6,000 covering interest alone.

If you use a balance transfer credit card, you will be charged an initial balance transfer rate of between 3% and 5%, after which you will not be required to pay any interest for up to 18 months. Continue making those same monthly payments, and you’ll repay $9,000 before that introductory period ends, which means your debt will be reduced to just $6,000 and can be cleared in 14 months with less than $800 in total interest.

This is a fantastic option if you have a strong credit score, otherwise, you may struggle to find a credit limit high enough to cover your debts. However, it’s worth noting that:

  • Your credit score may take an initial hit due to the new account and maxed-out credit card.
  • The interest rate may be higher, so it’s important to clear as much of the balance as you can before the introductory period ends.
  • You may be charged high penalty fees for late payments.
  • You can’t move credit card debt from cards owned by the same provider.

What About Debt Settlement?

Debt settlement works in a similar way to debt management, in that other companies work on your behalf to negotiate with your creditors. However, this is pretty much where the similarities end.

A debt settlement specialist will request several things from you:

  • You pay a fee (charged upon settlement).
  • You move money to a secure third-party account.
  • You stop meeting your monthly payments.

They ask you to stop making payments for two reasons. Firstly, it will ensure you have more money to move to the third-party account, which is what they use to negotiate with creditors. They will offer those creditors a lump sum payment in exchange for discharging the debt, potentially saving as much as 90%, on top of which they will charge their fee. 

Secondly, the more payments you miss, the more unlikely it is that your account will be settled in full, at which point the lender will be more inclined to accept a sizable settlement.

Debt settlement is not without its issues. It can reduce your credit score, increase the risk of litigation and take several years to complete. However, it’s the cheapest way to clear your debts without resorting to bankruptcy.

You can do debt settlement yourself by contacting your creditors and negotiating reduced sums, but you will need to have a large sum of cash prepared to pay these settlements and you’ll also need a lot of patience and persistence. There are also companies like National Debt Relief that can help, as well a huge number of lesser-known but equally reputable options. 

Who is Eligible for a Personal Loan for Debt Consolidation?

In theory, you can use a personal loan as a debt consolidation loan. In other words, instead of working with a debt consolidation company and allowing them to set the rates and find suitable terms, you just apply for a personal loan, use it to pay off your debts, and then focus your attention on repaying that loan.

This can work very well if you’re using it to repay credit card debt. The average credit card APR in the US is 16% to 20%, while the average personal loan rate is closer to 6%. A personal loan acquired for this purpose will give you more control over the total interest and repayment term. 

However, while you may pay less over the term, it’s unlikely that you’ll reduce your monthly payments. A debt consolidation loan is designed to provide an extended-term so that the monthly payment will be reduced, and unless you choose a loan with a long term, you won’t get the same benefits.

The biggest issue, however, is that you need a very good credit score to get a loan that is big enough to cover your debts and has interest that is low enough to make it a viable option. This is easier said than done, and if you’re drowning in debt there’s a good chance your credit score will not be high enough to make this feasible. 

Is it Time for Bankruptcy?

If you have mounting credit card debt, personal loan debt, and private student loans, and you’re struggling to make the repayments or clear more than the minimum amount, you may want to consider bankruptcy.

It should always be seen as the last resort, as it can have a seriously negative impact on your credit score and make it difficult to get a home loan, car loan, or low-interest credit card for many years. However, if you’re not confident that debt settlement will work for you and believe you’re too far gone for debt management and consolidation, speak with a credit counselor and discuss whether bankruptcy is the right option.

You can learn more about this process in our guides to Filing for Bankruptcy and Rebuilding your Credit After Bankruptcy.

Debt Consolidation for Bad Credit Homeowners

If you own your home, you have a few more options for debt consolidation. When you use your home as collateral against a loan it’s known as a secured debt. It means the lender can repossess your home if you fail to meet the repayments. This also eliminates some of the risks associated with lending, which means they offer more favorable interest rates and terms.

Home Equity Loan and HELOC

An equity loan is a large personal loan secured against the value tied-up in your home. You can acquire an equity loan when you own a large share of your property, in which case you’re using that share as collateral.

Interest rates are very favorable, and you can receive a consolidation loan that clears all your debts and leaves only a small monthly payment and easily manageable debt in their place.

A home equity line of credit (HELOC), works in much the same way, only this time you’re given a line of credit similar to what you’d get with a credit card. You can use this credit to repay your debts, after which you just need to focus on repaying the HELOC.

An equity loan and a HELOC provide the lowest possible interest rates of any debt consolidation loan. However, failure to meet your monthly payments will damage your credit score and place your home at risk.

Cash-Out Refinancing for Consolidation

Cash-Out refinancing replaces your current mortgage with a new, larger mortgage. The difference between these two home loans is then released to you as a cash sum, allowing you to clear your debts in one fell swoop. 

Cash-Out refinancing is often used to fund a child’s college education or a new business, but it’s becoming increasingly common as a form of debt consolidation, helping American homeowners to clear credit card debt and other unsecured debts.

Reverse Mortgages

Reverse mortgages work in a similar way to home equity loans, but with a few key differences. Firstly, they are only offered to homeowners aged 62 or older. Secondly, there is no monthly payment and no other recurring obligations.

A reverse mortgage is only repaid when you sell the home or die. There are also some obligations with regards to maintaining the home and living in it full time, but you don’t need to pay any fees and can use the money gained from this mortgage to clear your debts.

Summary: Consider Your Options

A debt consolidation loan is a great option if you’re struggling with debt. You can try a debt management plan if you have bad credit, a balance transfer if you have great credit, and debt consolidation companies if you’re somewhere in the middle.

But as discussed already, these are not the only options. The debt relief industry is vast and caters for every type and size of debt. Do your research, take your time, and make sure you understand the pros and cons of each option before you decide.

How to Get Debt Consolidation Loans When You Have Bad Credit is a post from Pocket Your Dollars.

Source: pocketyourdollars.com

ByCurtis Watts

FHA Loan Requirements – Guideline & Limits

FHA loan requirements are simple; they’re different than conventional loan requirements. For a conventional loan, for example, you will need a good credit score. However a FHA loan credit score is only 580.

If you’re a first time home buyer and need a first time home buyer loan to purchase your dream home, then keep reading to find out how an FHA loan is right for you.

Click here to compare the rates if you’re thinking of applying for an FHA loan. It’s totally FREE.

In this article, we will cover several topics around the FHA loan requirements. As a first time home buyer, you will need to be aware of these requirements so that your home-buying process can go as smoothly as possible.

Here’s what we will cover: FHA loan limits, FHA loan rates, FHA loan credit score, FHA lenders, and so many others. In addition, we will address the difference between conventional loan requirements versus FHA loan requirements.

Click here to apply for a FHA loan.

FHA Loan Requirements – Guideline & Limits:

Buying a house through an FHA loan, while exciting, can be daunting, especially as a first time home buyer. Taking a few moments to familiarize yourself with the FHA loan requirements can save you from costly mistakes during the home buying process. Below is an overview of FHA loan process

FHA loan definition

What is an FHA loan? Simply stated, an FHA loan is a loan that is insured by the Federal Housing Administration. These type of loan are popular among first time home buyers because they allow them to put as low as 3.5% down payment and require a very low credit score.

So if you’re a first time home buyer with a bad credit, then an FHA loan makes more sense.


Feeling Overwhelmed With Your Finances?, You have options and there are steps you can take yourself. But if you feel you need a bit more guidance, simply speak with a financial advisorSmartAsset’s free tool matches you with fiduciary advisors in your area in 5 minutes. If you are ready to meet your goals, get started with Smart Asset today.


FHA loan limits

FHA loan limits refers to the maximum amount of loan the FHA will give you. For 2019, for example, in low cost areas, FHA loan requirements have been set in place allowing the maximum amount for a single family home to be $314, 827. Whereas for a four-plex, the maximum amount is $605,525.

FHA loan limits – low cost areas
Single Duplex Triplex Fourplex
$314,827 $403,125 $487,250 $605,525

 

For high cost areas, the FHA loan limits for a single family home is $726, 525 and for a duplex, the FHA limit is $930, 300. Those limits, of course vary depending on your states and they are update annually. So visit your state to determine what the FHA mortgage lending limits are.

FHA loan limits – high cost areas
Single Duplex Triplex Fourplex
$726,525 $930,300 $1,124,475 $1,397,400

Click here to compare current FHA loan mortgage rates

FHA loan vs conventional

When it comes to get a home loan for presumably the biggest purchase you’ll ever make in your life, you certainly have to know the key differences between an FHA loan and a conventional loan. While it’s easier to get approved for an FHA loan, it’s important so that you can make the best decisions.

FHA loan requirements

fha loan requirements
FHA credit score loan requirement

The FHA loan requirements are fairly simple and straightforward. Here’s what they require: 1) You must have a credit score of at least 580.

2) A 3.5% down payment is required. (*note, if your FICO score is between 500 and 579, then you will have to put 10% down payment). 3) You will have to pay Private Mortgage Insurance (PMI);

4) Your debt to income ratio must be < 43%. Your debt to income ratio is the percentage of your income that you spend on debt, including mortgage, car loan, student debt, etc..

5) The home you intend to purchase must be your primary residence. You must also occupy the property within 60 days of closing.

Click here to shop for FHA mortgage rates in your area

It can’t be an investment property. However, you can buy a duplex or triplex, live in one unit and rent the other units. As long as you reside in the property, you will satisfy that requirement. Also, the house must meet FHA loan limits (see above).

6) Finally, and of course, you must have a steady income and proof of employment. I will discuss later whether a FHA loan is better than a conventional loan. For more information about FHA loan requirements in general, visit the FHA website.

Conventional loan requirements

The requirements for a conventional loan, however, are much stricter. By the way a conventional loan or traditional loan is not insured by the Federal Housing Administration. But instead it is guaranteed by a private lender such as a bank, credit union, mortgage companies, etc…

Of course whether you will qualify for a conventional loan vary from lenders to lenders, but the following are required:

1) A credit score of at least 680 (of course the higher the score is, the more likely you will get qualified, and the lower your interest rate on the loan will be.

2) A down payment of at least 20% of the house purchase price. If you have less than 20%, you still can get the loan. But the problem is, you will have to take out private mortgage insurance, pay its premiums until you achieve at least 20% equity in the house.

3) Your debt to income ratio needs to be around 36% and no more than 43%.

Should you apply for an FHA loan or conventional loan?

As you can see above, the FHA loan requirements are less strict than the conventional loan requirements. However, which one you choose to apply to depends on your personal circumstances.

But if you are a first time home buyer, there are a lot of good reasons why an FHA loan would seem more appealing to you. For one, the down payment is only 3.5% (compare that with a 20% down payment a conventional loan requires). A down payment is the upfront money you need to to make when buying a home.

As a first time home buyer, saving for a 20% down payment on a house can be a big burden. Homes are expensive. For example, saving for $450,000 home can take you years to accomplish, especially if you have other debt like student debt, credit card debt, car loan, etc… So a 3.5% down payment makes it easier for you to buy your own home.

Second, the FHA loan credit score is only 580. Although, you should always take steps to raise your credit score, sometimes certain changes in your life may leave you with a low credit score. Perhaps, you had to file for bankruptcy which resulted in a low credit score.

Or maybe you never had a credit card, which means that you don’t have an established credit history. Or maybe you’re a victim of identity theft which lowered your credit score. So there are several reasons why you could have a low credit score.

However, that shouldn’t mean you can’t buy a house. That’s why the FHA loan requirements make it easier for folks who otherwise would not have been qualified for a conventional loan.

Related Articles:

5 Signs You’re Not Ready To Buy A House

The Biggest Mistakes Millennials Make When Buying a House

How Much House Can I afford

Buy a home with the Right Financial Advisor

You can talk to a financial advisor who can review your finances and help you reach your goals. Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.

The post FHA Loan Requirements – Guideline & Limits appeared first on GrowthRapidly.

Source: growthrapidly.com

ByCurtis Watts

Buying A Second Home? 8 Things To Consider

Buying a second home is a major expense. You might have several reasons for wanting to buy a second house. Perhaps, you’re buying a second home for vacations or weekend getaways. Or, it might be that you want to use it as a rental property for rental income. However, there are things to consider before buying a second home.

The benefits of buying a second home

If you’re buying a second home for rental income, you’ll benefit from many perks, especially tax advantages.

For example, you will be able to deduct interest, property taxes, homeowners insurance and other expenses against the property’s income.

Even if the value of the property declines, you will still be able to deduct depreciation from your taxes.

While these benefits are great, the mortgage requirements for a second home are much stricter than for a mortgage on your primary residence. So, make sure you can afford it.

8 Things To Consider When Buying A Second Home

1. Financing options: When you bought your first home, you had available to you what’s called an FHA loan – a government loan program.

FHA loans are an appealing and favorite choice among first time home buyers due to their relatively low down payment requirement.

FHA loans require a 3.5% down payment and a relatively low credit score of 580. However, FHA loans are not available to second home buyers.

That is because FHA requires the home to be the borrower’s primary residence. So, if you’re thinking of buying a second home, you will need to either use a conventional loan or financing it with your own cash.

2. A larger down payment: If you’re using a conventional loan for your second home, you will need to come up with a larger down payment.

Lenders for a conventional loan usually requires a 20% down payment of the home purchase price.

But for a second home which will be used as a rental property or vacation home, expect lenders to ask for 30% or even 35%.

3. A higher credit score. For an FHA loan, you only need a credit score of 580 to qualify. But for a conventional loan on a second home, you will need much higher credit score — usually 750 or higher.

4. Expect a Higher Interest Rate: Lenders will likely charge you a higher interest rate on your second home than your primary residence.

The reason is because they see a second home — be it a vacation home or a rental property — as riskier. They feel that you are more likely to default on a mortgage on your second home than on your primary residence.

5. Do your research: Just as you did your homework when you bought your place to live in, buying a second home is no different.

In fact, you’ll need to spend more time researching rental property. That means researching the neighborhood you will want to invest in, knowing the zoning laws for a particular area, the sales price for the homes in the area.

You will need to know if the area has adequate public transportation, schools, grocery shopping, etc,– things that potential tenants will need.

6. Be prepared to be a landlord: if you’re buying a second home to rent, be prepared to be a landlord.

And be prepared to deal with all of the headaches that come with being a landlord. Do you have sufficient time? Can you deal with problems?

Owning a rental property and being a landlord is time consuming. It is also hard hard work and you have to do your due diligence.

You can hire a property manager to run the property for you. But if that is not feasible, you’ll have to do it yourself.

That means, screening new tenants, collecting rent, dealing with delinquent tenants, fixing problems in the property, such as a broken pipe.

So before buying a second home, make sure you have sufficient time and make sure you can deal with the day-to-day headaches that come with being a landlord.

7. Do you have a stable income? Dealing with a second mortgage on your second home is doable.

While you may be able to afford upfront costs, if you don’t have a stable income, you may have to think twice about whether it is a good idea.

Plus, you still have to consider the additional expenses of owning a second home such as insurance, property taxes, maintenance, repairs, property management fees, etc.

8. Are you out of credit card debt? If you have paid off outstanding and high interest credit card debts, then purchasing a second home may make sense.

But if you’re still struggling to pay your debt, you may need to put buying a second home on hold. 

The bottom line

If you’re thinking about buying a second home, whether it is for investment or vacation, be prepared to save some money, budget for expenses, and come up with a bigger down payment.

More importantly, spend as much time, if not more, researching for the home just as you did when your purchased your primary home.

Speak with the Right Financial Advisor

  • If you have questions about your finances, you can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc).
  • Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.

The post Buying A Second Home? 8 Things To Consider appeared first on GrowthRapidly.

Source: growthrapidly.com

ByCurtis Watts

Credit Card Balance Transfers

Credit card balances are crippling households across the United States, giving them insurmountable debts that just keep on growing and never seem to go away. But there is some good news, as this problem has spawned a multitude of debt relief options, one of which is a credit card balance transfer.

Balance transfers are a similar and widely available option for all debtors to clear their credit card balances, reduce their interest rate, and potentially save thousands of dollars.

How Credit Card Balance Transfers Work

A balance transfer credit card allows you to transfer a balance from one or more cards to another, reducing credit card debt and all its obligations. These cards are offered by most credit card companies and come with a 0% APR on balance transfers for the first 6, 12 or 18 months.

Consumers can use this balance transfer offer to reduce interest payments, and if they continue to pay the same sum every month, all of it will go towards the principal. Without interest to eat into their monthly payment, the balance will clear quickly and cheaply.

There are a few downsides to transferring a balance, including late fees, a transfer fee and, in some cases, an annual fee.

What Happens When You Transfer a Balance on Credit Cards?

When you transfer a balance, your new lender repays your credit card debt and moves the funds onto a new card. You may incur a transfer fee and pay an annual fee, which can increase the total debt, but transferring a balance in this way allows you to take advantage of a 0% introductory APR. While this introductory period lasts, you won’t pay any interest on your debt and can focus on clearing your credit card debt step by step.

Why are Balance Transfers Beneficial?

A little later, we’ll discuss some alternatives to a balance transfer offer, all of which can help you clear your debt. However, the majority of these methods will increase your debt in the short term, prolong the time it takes to repay it or reduce your credit score. 

A balance transfer credit card does none of these things. As soon as you accept the transfer offer, you’ll have a 0% introductory APR that you can use to eliminate your debt. The balance transfer may increase your debt liabilities slightly by adding a transfer fee and an annual fee, but generally speaking, this is one of the best ways to clear your debt.

To understand why this is the case, you need to know how credit card interest works. If you have a debt of $20,000 with a variable APR rate of 20% and a minimum monthly payment of $500, you’ll repay the debt in 67 months at a cost of over $13,000 in interest.

If you move that debt to a card with a balance transfer offer of 0% APR for 12 months, and you continue to meet the $500 minimum payment, you’ll repay $5,000 and reduce the debt to $15,000. From that point on, you’ll have a smaller balance to clear, less interest to worry about, and can clear the debt completely in just a few more years.

Of course, the transfer fee will increase your balance somewhat, but this fee is minimal when compared to the money you can save. The same applies to the annual fee that these cards charge and, in many cases, you can find cards that don’t charge an annual fee at all. 

You can even find no-fee balance transfer cards, although these are rare. The BankAmericard credit card once provided a no fee transfer offer to all applicants, in addition to a $0 annual fee. However, they changed their rules in 2018 and made the card much less appealing to the average user.

Pros and Cons of Credit Card Balance Transfers

From credit score and credit limit issues to a high variable APR, late fees, and cash advance fees, there are numerous issues with these cards. However, there are just as many pros as there are cons, including the fact that they can be one of the cheapest and fastest ways to clear debt.

Pro: 0% Introductory APR

The 0% APR on balance transfers is the best thing about these credit cards and the reason they are so beneficial. However, many cards also offer 0% APR on purchases. This means that if you continue to use your card after the transfer has taken place, you won’t be charged any interest on the new credit.

With most cards, the 0% APR on purchases runs for the same length of time as the balance transfer offer. This ensures that all credit you accumulate upon opening the account will be subject to the same benefits. Of course, accumulating additional credit is not wise as it will prolong the time it takes you to repay the debt.

Pro: Can Still Get Cash Rewards

While cash rewards are rare on balance transfer cards, some of the better cards still offer them. Discover It is a great example of this. You can earn cash back every time you spend, even after initiating a balance transfer. The cash rewards scheme is one of the best in the industry and there is also a 0% APR on balance transfers during an introductory period that lasts up to 18 months.

Pro: High Credit Limit

A balance transfer card may offer you a high credit limit, one that is large enough to cover your credit card debt. You will need a good credit score to get this rate, of course, but once you do your credit card debt will clear, you can repay it, and then you’ll have a card with a high credit limit and no balance.

Throw a rewards scheme into the mix (as with the Discover It rewards card) and you’ll have turned a dire situation into a great one.

Con: Will Reduce Credit Score

A new account opening won’t impact your credit score as heavily as you may have been led to believe. In fact, the impact of a new credit card or loan is minimal at best and any effects usually disappear after just a few months. However, a balance transfer card is a different story and there are a few ways it can impact your score.

Firstly, it could reduce your credit utilization ratio. This is the amount of credit you have compared to the amount of debt you have. If you have four credit cards each with a credit limit of $20,000 and a debt of $10,000 then your score will be 50%. If you close all of these and swap them for a single card where your credit limit matches your debt, your score will be 100%.

Your credit utilization ratio points for 30% of your total FICO score and can, therefore, do some serious damage to your credit score.

Secondly, although FICO has yet to disclose specifics, a maxed-out credit card can also reduce your score. By its very nature, a balance transfer card will be maxed out or close to being maxed out, as it’s a card opened with the sole purpose of covering this debt.

Finally, if you close multiple accounts and open a new one, your account age will decrease, thus reduce your credit score further.

Con: Transfer Free

The transfer fee is a small issue, but one worth mentioning, nonetheless. This is often charged at between 3% and 5% of the total balance, but there are also minimum amounts of between $5 and $10, and you will pay the greater of the two.

This can sound like a lot. After all, for a balance transfer of $10,000, 5% will be $500. However, when you consider how much you can save over the course of the introductory period, that fee begins to look nominal.

There may also be an annual fee to consider, but if your score is high enough and you choose one of the cards listed in this guide, you can avoid this fee.

Con: Late Fees and Other Penalties

In truth, all credit cards will charge you a fee if you’re late and you will also be charged a fee every time you make a cash advance. However, the fees may be higher with balance transfer cards, especially if those cards offer generous benefits and rewards elsewhere. It’s a balancing act for the provider—an advantage here means a disadvantage there.

Con: High APR on Purchases

While many balance transfer cards offer a 0% APR on purchases for a fixed period, this rate may increase when the introductory period ends. The resulting variable APR will often be a lot larger than what you were paying before the transfer, with many credit cards charging over 25% or more on purchases.

Which Credit Cards are Best for Clearing Credit Card Debt?

Many credit card issuers have some kind of balance transfer card, but it’s worth remembering that credit card companies aren’t interested in offering these cards to current customers. You’ll need to find a new provider and if you have multiple cards with multiple providers, that can be tricky. 

Run some comparisons, check the offers against your financial situation, and pay close attention to late fees, APR on purchases, cash rewards, and the length of the 0% introductory APR rate. 

You’ll also need to find a card with a credit limit high enough to cover your current debt, and one that accepts customers with your credit score. This can be tricky, but if you shop around, you should find something. If not, focus on increasing your credit score before seeking to apply again.

Here are a few options to help you begin your search for the most suitable balance transfer card:

Discover It

  • Balance Transfer Offer: 18 Months
  • Transfer Fee: 3% on transfers
  • Purchases APR: 0% for 6 months
  • Annual Fee: $0
  • Rate: Up To 24.49% Variable APR
  • Rewards: Yes

Chase Freedom Unlimited

  • Balance Transfer Offer: 15 Months
  • Transfer Fee: 5% on transfers
  • Purchases APR: 0% for 15 months
  • Annual Fee: $0
  • Rate: Up To 25.24% Variable APR
  • Rewards: Yes

Citi Simplicity

  • Balance Transfer Offer: 21 Months
  • Transfer Fee: 5% on transfers
  • Purchases APR: 0% for 12 months
  • Annual Fee: $0
  • Rate: Up To 26.24% Variable APR
  • Rewards: No

Bank of America Cash Rewards

  • Balance Transfer Offer: 15 Months
  • Transfer Fee: 3% on transfers
  • Purchases APR: 0% for 15 months
  • Annual Fee: $0
  • Rate: Up To 25.49% Variable APR
  • Rewards: No

Capital One Quicksilver

  • Balance Transfer Offer: 15 Months
  • Transfer Fee: 3% on transfers
  • Purchases APR: 0% for 15 months
  • Annual Fee: $0
  • Rate: Up To 25.49% Variable APR
  • Rewards: No

Blue Cash Everyday Card from American Express

  • Balance Transfer Offer: 15 Months
  • Transfer Fee: 3% on transfers
  • Purchases APR: 0% for 15 months
  • Annual Fee: $0
  • Rate: Up To 25.49% Variable APR
  • Rewards: No

Capital One SavorOne

  • Balance Transfer Offer: 15 Months
  • Transfer Fee: 3% on transfers
  • Purchases APR: 0% for 15 months
  • Annual Fee: $0
  • Rate: Up To 25.49% Variable APR
  • Rewards: Yes

How to Clear Debt with a Balance Transfer Card

From the point of the account opening to the point that the introductory period ends, you need to focus on clearing as much of the balance as possible. Don’t concern yourself with a variable APR rate, annual fee or other issues and avoid additional APR on purchases by not using the card. Just put all extra cash you have towards the debt and reduce it one step at a time.

Here are a few tips to help you clear debt after you transfer a balance:

Meet the Monthly Payment

First things first, always meet your minimum payment obligations. The 0% APR on balance transfers protects you against additional interest, but it doesn’t eliminate your repayments altogether. If you fail to meet these payments, you could find yourself in some serious hot water and may negate the balance transfer offer.

Increase Payment Frequency

It may be easier for you to repay $250 every two weeks as opposed to $500 every month. This will also allow you to use any extra funds when you have them, thus preventing you from wasting cash on luxury purchases and ensuring it goes towards your debt.

Earn More

Ask for a pay rise, take on a part-time job, work as a freelancer—do whatever it takes to earn extra cash during this period. If you commit everything you have for just 12 to 18 months you can get your troublesome debt cleared and start looking forward to a future without debt and complications, one where you have more money and more freedom.

Sell Up

It has never been easier to sell your unwanted belongings. Many apps can help you with this and you can also sell on big platforms like Facebook, eBay, and Amazon. 

Sell clothes, electronics, books, games, music—anything you no longer need that could earn you a few extra dollars. It all goes towards your debt and can help you to clear it while your introductory APR is active.

Don’t Take out a Personal Loan

While you might be tempted to use a loan to cover your debt, this is never a good idea. You should avoid using low-interest debt to replace high-interest debt, even if the latter is currently under a 0% introductory APR. 

It’s easy to get trapped in a cycle of swapping one debt for another, and it’s a cycle that ultimately leads to some high fees and even higher interest rates.

Focus on the Bigger Picture

Debt exists because we focus too much on the short-term. Rather than dismissing the idea of buying a brand-new computer we can’t afford, we fool ourselves into believing we can deal with it later and then pay for it with a credit card. This attitude can lead to persistent debt and trap you in an inescapable cycle and it’s one you need to shed if you’re going to transfer a balance.

Instead of focusing on the short term, take a look at the bigger picture. If you can’t afford it now, you probably can’t afford it later; if you can’t repay $10,000 worth of debt this year, you probably can’t handle $20,000 next year.

Alternatives to Credit Card Balance Transfers

If you have the cash and the commitment to pay your credit card debt, a balance transfer card is perfect. However, if you have a low credit score and use the card just to accumulate additional debt and buy yourself more time, it will do more harm than good. In that case, debt relief may be the better option.

These programs are designed to help you pay your debt through any means possible. There are several options available and all these are offered by specialist companies and providers, including banks and credit unions. As with balance transfer cards, however, you should do your research in advance and consider your options carefully before making a decision.

Pay More Than the Minimum

It’s an obvious and perhaps even redundant solution, but it’s one that needs to be mentioned, nonetheless. We live in a credit hungry society, one built on impulsive purchases and a buy-now-care-later attitude. A balance transfer card, in many ways, is part of this, as it’s a quick and easy solution to a long and difficult problem. And like all quick patches, it can burst at the seams if the problem isn’t controlled.

The best option, therefore, is to try and clear your debts without creating any new accounts. Do everything you can to increase your minimum payment every month. This will ensure that you pay more of the principal, with the minimum payment covering your interest obligations and everything else going towards the actual balance.

Only when this fails, when you genuinely can’t cover more than the minimum, should you look into opening a new card.

Debt Consolidation

Balance transfers are actually a form of debt consolidation, but ones that are specifically tailored to credit card debt. If you have multiple types of debt, including medical bills, student loans, and personal loans, you can use a consolidation loan to clear it.

This loan will pay off all of your debts and then give you a new one with a new provider. The provider will reduce your monthly payment and may even reduce your interest rate, allowing you to pay less and to feel like you’re getting a good deal. However, this is at the expense of a greatly increased loan term, which means you will pay considerably more over the duration of the loan.

As with everything else, a debt consolidation loan is dependent on you having a good credit score and the better your financial situation is, the better the loan rates will be.

Debt Management

Debt management can help if you don’t have the credit history required for debt consolidation. Debt management plans are provided by companies that work with your creditors to repay your debts in a way that suits you and them. You pay the debt management company, they pass your money on, and in return, they request that you abide by many strict terms and conditions, including not using your credit cards.

Many debt management programs will actually request that you close all but one of your credit cards and only use that one card in emergencies. This can greatly reduce your credit score by impacting your credit utilization ratio. What’s more, if you miss any payments your creditors may renege on their promises and revert back to the original monthly payments.

Debt Settlement

The more extreme and cheaper option of the three, but also the riskiest. Debt settlement works well with sizeable credit card debt and is even more effective if you have a history of missed payments, defaults or collections. A debt specialist may request that you stop making payments on your accounts and instead put your money into a secured account run by a third-party provider.

They will then contact your creditors and negotiate a settlement amount. This process can take several years as they’re not always successful on the first attempt but the longer they wait, the more desperate your creditors will become and the more likely they will be to accept a settlement.

Debt settlement is one of the few options that allows you to pay all your debt for much less than the original balance. However, it can harm your credit score while these debts are being repaid and this may impact your chances of getting a mortgage or a car loan for a few years.

Credit Card Balance Transfers is a post from Pocket Your Dollars.

Source: pocketyourdollars.com