The Complete Lowdown On Credit Card Debt Consolidation

It’s a great feeling to have when you know that you can afford most things you lay your eyes on by just swiping a piece of plastic. For better or worse, credit cards have the potential to provide you with increased financial flexibility and make you financially independent. 

While it’s all well and good as long as you’re paying your credit card bill in full every month, a few partial payments and continued reckless spending can lead to debt racking up. Before you know it, you’ll be facing a situation where you’re still paying a lot for your credit card bill but it’s only enough to offset the high-interest charges.

The problem can only get worse if you have more than one credit card. With several monthly bills, multiple payment dates, and varying interest rates, your finances can take a turn for the worse. A credit card debt consolidation plan is one way how you can avoid such a mess. Read on to find out everything you need to know about managing your credit card debt effectively.

How Does Debt Consolidation Work?

Put simply, debt consolidation is a form of repayment strategy wherein you combine all your old debts into a single new repayment. In ideal conditions, this new repayment will either have a shorter tenure or a lower interest rate.

Such a debt-relief plan usually ends up being a long-term financial strategy that you can use to get rid of the financial mess you’re in. If you do it the right way, debt consolidation can help you get out of debt faster while still protecting your credit score.

When’s the Right Time to Consolidate Credit Card Debt?

When you’re up to your neck in credit card debt, you’re bound to be attracted to any kind of debt-relief plan. At such times, choosing the wrong consolidation option can be just as bad as increasing your overall debt.

To stand the best chance of getting rid of all your debts efficiently, it’s vital that you take up the right option at the most opportune moment. Here are a few signs to help you understand when the right moment is to consolidate your credit card debt:

When Restructuring is All That You Need

More often than not, restructuring or reorganising all your old debt payments can go a long way in solving your credit-related problems. While you may not be able to reduce your overall balance in some cases, a little organisation can help you bundle multiple debt payments into a single one. This way, you’ll be able to deal with your overall debt more effectively.

When You Don’t Have the Time to Deal With Multiple Payments

The idea of restructuring and reorganising also holds good for those of you who don’t have the time to deal with multiple debt payments. When you’re too busy to handle multiple credit accounts, chances are that you’ll end up missing payments and increase your overall debt.

In such cases, consolidating your debt will only help in making the overall process of repayments simpler, convenient, and less time-consuming.

When You Want to Improve Your Credit Score

When you take on more debt than you can handle, your credit report can take a big hit. Taking up a debt consolidation plan in such cases will only cause the situation to get worse. But, if you keep up with all the terms of the debt consolidation plan you choose, you can expect your credit score to only improve.

The Best Ways to Consolidate Credit Card Debt in Malaysia

With credit card usage becoming a significant part of how Malaysians transact on a day-to-day basis, there’s bound to be some complacency and misuse at one point or another. This can invariably lead to an increase in overall credit card debt.

When it comes to consolidating credit card debt, there are multiple avenues that you can resort to according to your needs. Here are the best options that you can consider:

Balance Transfer

Most Malaysian banks offer multiple credit cards that come with a balance transfer feature. With this feature, you can transfer any outstanding balance that you have on another bank’s credit card to the new card.

The biggest benefit of this feature is that you can repay the transferred balance at a lower interest rate. There are plenty of banks in Malaysia that offer low-interest or even zero-interest balance transfer cards.

Keep in mind:

  • Most balance transfer cards in Malaysia offer a low-interest rate only for a promotional period. Once the promotion expires, the card’s interest may increase, thereby increasing your overall repayment.
  • Some balance transfer cards will only charge you a one-time upfront fee as opposed to an interest rate.
  • If you fail to make payments on time, the usual finance charges will come into play, thereby increasing the amount of interest to be paid.
  • Avoid using the balance transfer card for any other purpose other than what it’s intended for. Additional retail purchases made on such cards can only increase your overall debt.

Effect on your credit score:

While the credit card company’s inquiry can affect your credit score, the impact isn’t something that you can’t manage. With aggressive payments during the low-interest period, you can more than make up for the temporary drop in your credit score.

Personal Loan

A personal loan is an extremely useful financial tool that you can use for any purpose that you see fit. With comparatively low-interest rates and a high financing margin on offer, taking a personal loan can be a great way to consolidate your credit card debt. Most Malaysian banks offer plenty of personal loan options that you can choose from.

Keep in mind:

  • If your repayment behaviour or overall credit history isn’t very good, chances are that your personal loan application won’t get approved.
  • While personal loan interests may be lower when compared to a credit card, any additional fees and charges can more than make up the difference.

Effect on your credit score:

When you take a personal loan, you’re opening a new line of credit that can cause a dip in your credit score. But, if you make payments on time and follow all terms of the loan agreement, there’s no reason why your credit score won’t improve.

Debt Consolidation Loan

Debt consolidation loans work pretty much the same way as personal loans. What differentiates them is the fact that they offer very low-interest rates as they’re only meant for the purpose of helping you manage your debt.

Keep in mind:

  • Most banks in Malaysia offer debt consolidation loans with a low-interest rate only for a specific period of time. As time passes, there’s every chance that your lender can increase the overall interest you need to pay.
  • Most debt consolidation loans have lower monthly payments because of an increase in the overall repayment tenure. So in effect, you’ll end up paying more interest.
  • Just like personal loans, debt consolidation loans can also possibly have additional fees and charges that can offset the reduced interest.

Effect on your credit score:

Taking up a debt consolidation loan means that you need help to manage your finances. This doesn’t paint a very good picture of your repayment ability to any lender. As a result, your credit score gets affected in a big way.

But just like other repayment options, making on-time payments can go a long way in helping you recover your overall credit score.

Home Loan Overdraft

This facility allows you to borrow money against your residential property as equity. You’ll get a pre-determined interest rate, which is much lower than high credit card interest charges in most cases. You’ll even get more flexible repayment terms and conditions.

Keep in mind:

  • Using the home loan overdraft facility can be a very risky move as any missed payments can increase your debt and you could eventually end up losing your home.
  • Taking out such a loan can restrict your options when you have to sell your home or even refinance it.

Effect on your credit score:

Just like any other new line of credit, resorting to a home loan overdraft facility can lead to a negative impact on your overall credit score. But, if you use the money responsibly to pay off all your other high-interest debts and make payments on time for this loan, your credit score will improve.

What Should You Look Out for Before Consolidating Credit Card Debt

Before you jump into taking up any debt consolidation plan, it’s important that you consider a couple of factors. With a little groundwork, you’ll be able to figure out which credit card debt consolidation strategy works for you. Here are some important things you should pay heed to before deciding on a repayment strategy:

Assess Your Overall Credit History

To begin with, check if all the details on your latest credit report are accurate. Any disputes or errors can stop you from getting the help you need. In addition, remember to understand all the components of this report so you know what you need to do to improve your credit score.

Recheck Your Finances

If you have a stable source of income every month that’s more than what you spend during the same period, a debt-relief plan may not be of much use, especially if you have a fixed monthly budget. If you don’t have a budget in place, you could always seek assistance from a non-profit credit counselling agency.

Pick the Right Debt-Relief Option

Once you realise where you stand as a debtor, choosing the right debt consolidation plan is of utmost importance. As mentioned earlier, there are a number of avenues that you can choose from when you know it’s time to consolidate your credit card debt.

Stick With Your Financial Plan

Once you have decided that a debt consolidation plan is the best way forward, ensure that you’re committed to your budget for the foreseeable future. Debt relief plans can go on for some time and it’s important that you’re focused on repaying the money you owe at all times.

Remember that no matter how bad your credit card debt is, a little research can help you find a workable solution that suits you. If your credit card debt has spiralled out of control and reached unmanageable levels, you could always speak to your lending bank for more help.

About Author:

Syed Faraz is a Content Marketing Strategist at BBazaar.my, an online consumer financial marketplace in Malaysia that will help People to make the smart choice and save money with personal financial matters. Twitter

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