The average American carries 2.35 credit cards and — according to a 2018 NerdWallet study — a total outstanding balance of $6,929 in revolving credit card debt. On top of that, those borrowers are looking at an average of $1,141 in annual interest payments.*
If you find yourself relating to the numbers above, it’s time to learn the two reasons why credit card debt consolidation should be near the top of your list of things to do.
1. Focus on one manageable payment
If you have two to three different credit cards in use, it may be difficult to keep up with how interest affects you. You may know when your minimum monthly payment is due each month, but do you really understand the extra charges you may incur by not paying the card down sooner?
Rather than pay such high-interest rates and worry about multiple cards, what if you could consolidate that debt into one lower rate payment option? That way you only have one manageable bill to focus on. It’s possible. But before we discuss the strategic solution we prefer, let’s look at how your credit score is affected by credit card debt.
2. Improve your credit score
When you use more than 30 percent of your available credit, you can ding your credit score. How? You have a credit utilization ratio, which is the amount of credit you’ve used compared with the amount of credit you have available. Your credit utilization comprises 30 percent of your FICO score, so that’s why your score drops when you have higher balances. As your credit utilization goes up, your credit score goes down.
Improve your credit score by keeping your credit utilization at bay. You can do this by:
1. Setting up balance alerts
2. Paying down your balance(s) early
3. Decreasing your spending
4. Raising your card limits/opening a new card (but not using the extra credit)
5. Keeping zero balance cards open
How to fix credit card debt
When asked how they’re handling credit card debt, 80 percent of consumers polled in a creditcards.com survey said they have a strategy for paying their balances down to zero. Among those who don’t have a plan to tackle their credit card debt, though, 42 percent gave this as their reason: “I just don’t know where to start.”
As promised earlier, it’s time for our suggested strategy — a cost-effective, money-saving option designed for homeowners. It’s called debt consolidation, and you use your home equity to pay off high-interest debt. You secure a lower mortgage rate, so you’re being charged less interest to borrow money. No more compounding revolving debt interest, which can really add up.
The benefit of consolidating now
The Federal Reserve (Fed) is meeting in March, and that means we could be looking at higher rates. How? Well, when the Fed increases its benchmark interest rate — the federal funds rate — most credit cards increase rates by the same amount. While mortgage rates won't rise by the same amount, they can be directly influenced by a Fed rate hike.
Recent Fed communications imply there will not be a March increase; however, they may approve one to two rate hikes later in the year. This could result in credit card debt getting more expensive and mortgage rates ticking up a bit. It's worth considering debt consolidation now while interest rates are competitive.
Things to keep in mind
Refinancing your home to pay off credit card debt can be an effective tool to manage debt, as long as you’re confident you won’t go back to old spending habits. Secondly, you’ll want to choose a mortgage lender who does not reset your loan during the refinance. Otherwise, you could be paying more over time.
*This average can vary depending on what part of the country a person lives, how old they are, and a few other factors.