iCrowdNewswire Dec 21, 2020 5:26 AM ET
Credit card consolidation is a strategy some borrowers use to bundle their debts into a single monthly payment while trying to reduce the amount of interest they’re paying. There are a few different ways to go about consolidation, such as taking out a personal loan to pay off outstanding unsecured debts.
Making consolidation works for you depends on finding the best-fit method depending on your circumstances and running the numbers ahead of time so you can understand how much you stand to save, if any. There are cases where people have run the numbers on consolidation and even found they’d end up paying more — so they’re better off tackling their existing debts “the old-fashioned way.”
One tool borrowers can use to their advantage is a credit card consolidation calculator, which handles the actual math based on the financial information you enter. Here’s more on how to use a consolidation calculator
What Information You’ll Plug into the Calculator
In order to gain a full understanding of what you can expect from the debt consolidation process, you’ll need to plug in key financial information into a calculator, such as:
- Interest rate: The interest rate on a debt consolidation loan is perhaps the biggest factor affecting whether you’ll save money and how much.
- Loan term: The length of time over which you’ll be making monthly installments on your loan is also a key factor in how much it will cost over the long term.
- Up-front fees: Lenders may charge certain fees, like origination fees.
- Loan amount: The amount you borrow depends on the amount of unsecured debts, like credit card balances and/or medical bills, you’re trying to pay off.
Some calculators also ask you to input the amount you’re paying toward your balances currently so they can compare this to how much you’d pay on a consolidation loan. For instance, a calculator from NerdWallet compares when you’ll become free from debt based on your current monthly payments and balance vs. when you’ll pay off your debt following a personal loan.
Which Factors Affect Credit Card Consolidation?
Debt consolidation calculators offer a simple interface to help you calculate whether or not consolidation is a worthwhile endeavor.
Of course, not all debt consolidation products are created the same; in fact, the loans available to you may vary a lot based on the lender and your financial standing.
Creditworthiness, as demonstrated by credit score, majorly affects the interest rate for which a borrower is able to qualify. As Experian outlines, the national average interest rate on personal loans in America is just shy of 9.5 percent. However, interest rates often vary between 6 and 36 percent — depending primarily on credit score, as lenders view this as an indicator of risk. Debt-to-income ratio (DTI) is another factor lenders take into consideration, as a high DTI indicates the borrower is dealing with more debt and therefore may be riskier.
Before applying for debt consolidation help, even from a reputable firm like bills.com, research the offerings available to you — then input this information into an online calculator to estimate how much you’ll end up paying over the course of a loan. Take note of what happens to the total amount paid if you change variables like extending the loan term, increasing the interest rate, etc. It’s generally advisable to keep the loan term as short as you can while keeping the monthly payments reasonable, as the longer the term the more you’ll end up paying in interest charges.
Playing with these variables on a calculator is a simple way to determine whether consolidation is the right move for you and which loan is the most advantageous for your needs.