The average household has seven credit cards shared between department stores and major national banks. This means that the average family is paying seven different monthly installments of varying degrees. It is highly likely that if you totaled the seven payments up, it would be substantially higher than the singly payment you would make if you were to consolidate your seven credit cards onto a single one. This removes the necessity for budgeting seven payments across the month, which can be very stressful but is also quite unnecessary.
Perhaps what is more important than being able to save money simply by combining your payments is the peace of mind that you get from doing so. You see, when you consolidate you also avoid multiple fees. Hypothetically, if you lost your job or were laid off, or maybe you had an injury and couldn’t work, you would not be able to pay your bills. If you missed just one month’s worth of payments on all seven cards, you would have to pay seven late fees or penalties. This would put you so far behind that you might never be able to recover. Consolidating to a single credit card means one, easy monthly payment.
Obviously, when you consolidate your credit card balances, it changes the structure of your debt, which is a good thing. Saving money every month by reducing your payments from seven to one should give you the breathing room you need to make better decisions regarding your money. It allows you to plan for the future and actually put money away, saving properly. You can take the money that you save and buy something special or you can apply it to your balances to pay them down even sooner. This is usually what is recommended, as it is technically more important to reduce your credit liability and increase your consumer credibility, than it is to start saving significantly.
The reason you want to do this is because your credit liability is determined by your ratio of total debt versus credit used. Your credit score is not simply only determined by how promptly you make payments. Indeed it also has to do with the total amount of debt that is available to you compared with how much you actually owe. When you consolidate, it allows you to improve these numbers more efficiently. This tells banks that you are a quality investment and hopefully will cause them to look favorably on you when you need more credit for something bigger, like a home or a new car.
Improve Your Credit Score
In the end, what all of this means is a boost in your credit score. Raising your credit liability means nothing unless it ultimately affects your credit score. When you make consistent, succinct, substantial payments on your account it displays maturity, responsibility, and proper planning. Credit card companies and banks appreciate this, but until your credit score improves, they might not be willing to take a risk. If you had a string of bad luck or just wasn’t as responsible in your past, surely it will take its toll and you will have to compensate. However, it is not difficult to recover from this if you simply understand what it is going to take and are willing to make the necessary sacrifices. These sacrifices include making larger payments, even when they don’t seem necessary. Reducing your debt quickly also brings your numbers into perspective when compare to your income, which is another ratio banks use to determine how much credit you can have.
One thing that is particularly important to remember is that you do not necessarily want to start closing your credit cards once they are paid off. There are a couple reasons why you this is significant. First of all, your balance transfer card may only have a low rate on that particular type of credit, which means standard purchases will be much higher. If you have a card with a lower standard APR, it might be wise to keep it open and use it only for things that you really need until the other balance is paid down. Secondly, when you close credit cards it actually reduces your available credit which can hurt your credit score. Of course, it is a good idea to start closing cards that you don’t need so you will have to weigh these consequences and benefits and decide for yourself which strategy is best.
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