Credit Card Consolidation Step By Step

Credit Card Consolidation can be a overwhelming task for many people because they are not sure where to start. Here is a step by step guide of the steps that I followed not only to consolidate the debt, but dig myself out and eliminate my credit card debt.

Step One – Understanding your situation
First step is to gain an understanding of your situation. Make a list of all the cards you have along with the balance on each card, interest rate, available credit, yearly fee if any, and current monthly payment. We will not consider the size of the monthly payments here, we will take that into account in the budget step below. For this step we are just focused on understanding the cards we have and gaining insight into our credit card consolidation by determining which ones have the highest interest rates and should be paid off first and which ones may have lower interest rates that we may want to transfer balances to or use if we have an emergency.

Credit Card Consolidation Step 1

At this point I recommend calling the credit card companies to see if they will offer lower interest rates. Explain that you are in the process of consolidating your credit card debt so you can be debt free and are starting with the cards with higher interest rates, therefore if they provide you with a lower rate, you will pay off the other cards first. Do not get frustrated if you get turned down, make sure you call all your card issuers, it one takes one to say yes to save you money. If you have balances available on your cards they may even offer credit card consolidation offers. For the credit card consolidation offers, get the facts but do not act on them yet, we will review these options in step three. Update your spreadsheet to reflect the new interest rates if any of the card issuers have agreed to lower your rates.

Step Two – Monthly Budget
Ok, this is the step that most people dislike. Taking the time to understand where your money is being spent is not a fun task and then budget planning which may limit some of the things you want to spend money on is even less fun. Important step here as we need to determine how much money is going to be available each month to pay against the credit card debt. We have to make the minimum payments on all cards so this will provide us the details on what we can do to eliminate the debt. Yes, consolidating your cards will free up some money by reducing monthly payments, therefore you will have a choice of using the additional funds to pay off debt or for other purposes. When I was performing these steps I was looking to get out of debt, therefore used any available funds to reduce the debt. Although I recommend creating a budget, a simpler approach is to just add up all the minimum monthly payments of the credit cards. Then add some additional dollars (can just be $10/month but if you can afford more than that is even better) over the monthly payments that you will be using to pay off debt. This is the total funds you will be using each month to pay off the consolidated debt. I know it does not seem like much, but stick with me, you will be surprised. Since this article is focused on debt consolidation and not budgeting I have used the simpler approach below. For additional details on creating a family budget, see our budgeting page.

Credit Card Consolidation Step 2

Step Three – Reviewing the Options
Next step is to review any credit card consolidation offers we may have available to us. Look for offers you received in the mail along with any offers you may have been presented with while calling the various card companies. Do not worry if you do not have any offers available to you at this time, once you start to consolidate your debt you will start to receive offers. Here are some tips to understanding the offers and determining which are right for you. In order to review the offers, we need to collect some information. Create a table with the following information, all of which should be provided by the company with the offer. Yearly fee for the card if any, balance transfer percentage, balance transfer maximum. When complete your details should look like this.

Credit Card Consolidation Step 3

Step Four – Determine the Plan
Now we have all the information we need, it is decision and action time. One of the big unknowns, when considering credit card consolidation offers, is the balance available for the transfer as the companies normally do not tell you the balance you will be approved for until after you apply. Therefore we have to make some assumptions and adjust accordingly if things do not go as expected. One other thing to think about before we make our final decisions. I always maintain a daily use credit card that I pay off in full each month. Usually set this up for automatic withdrawal of the full amount due from my checking account. Also make sure this card pays at least 1% back on all my purchases and then use the money I get back to help pay off debt. Just one more way to gain a little more money to pay against debt. If you choose to do this, my suggestion is to use the card for areas you may normally pay cash, I use it for gas, utilities for my house, groceries, etc. If this is something you would like to do you will want to evaluate which cards you have already that pay money back or start looking for one that does. Make sure it does not charge a yearly fee. And make sure you have enough money in your account to pay the card in full each month. There should be no exceptions to this, if you do not feel you can pay the card in full, do not use it. Ok, on to making the credit card consolidation decisions. We are looking for two things. One is a way to eliminate high interest rate cards, the other a way to pay off a card so that we have more money each month to pay off debt. I recommend looking for the highest interest rate card that you can pay off in a year. Reasoning for this is that by paying off a card, it will improve your credit score and along with that balance transfer offers will start to come which you may be able to transfer the higher interest rate card to a special rate until you can pay off some others. Looking at our example, here is what I would do. And some of the assumptions I am making. Recommend trying for a consolidation of Bank D onto the offer from Bank Z. We are going to try for 5K credit card consolidation and hopefully we are accepted for the full amount. If possible, I recommend applying for the card before doing the balance transfer. That way if you are approved a for a credit limit that is too small to help you, you can just decline the card or easier yet, just never authorize or use it. Most card issuers will allow you to apply and then transfer the funds later. Note I have added a few columns to our consolidation offers spreadsheet that show how much it will cost to transfer the amount we are trying for and the savings we will get vs. leaving the money on card D. Note that I opted for the card with the longer term of 18 months of 0 interest even though it cost a little more to do. That is because, based on our list of cards, we know we are going to be in the credit card consolidation process for awhile, so this will be one card we do not need to worry about for a little while. We will still need to make monthly payments, but they should be less then we were making before because we are not paying the high 25% interest as we were with Bank D. Ok, so assuming we have consolidated Bank D onto Bank Z, we now have lower minimum monthly payments for the amount that we transferred, in this example I will say the minimum monthly payment decreased by $10/month. We will apply that $10 towards the card we are trying to pay off first which is the card from Bank B. The reason I selected this card is because, as I mentioned earlier, I like to find cards I can pay off in about 1 year. Bank A and Bank E have slightly higher interest rates, but they also have large balances and I would like to create some financial flexibility. By paying off a card, and not reusing it, I also have a chance to increase my credit score and possible get some better balance transfer offers. My thinking here is pay off Bank B in the first year then redo the steps but most likely will focus on Bank A next. Thinking is that Bank A will be a smaller balance in a year. Also anticipating, that as we improve our credit score, we get a balance transfer offer we can use towards Bank E. But all that is in the future, first things first and that is paying off Bank B then redoing the steps. Below is the updated credit card payments showing the consolidated card and the additional monthly payment amounts going toward Bank B. Note this amount starts off as $20/month over the minimum because I chose to pay $10/month more than the minimum in Step Two and I have also added the savings I received from the balance transfer. In the future my monthly payment to this card will continue to increase as minimum payments to the other cards decrease.

Credit Card Consolidation Step 4

Important note here is that as you make payments to your cards, the monthly minimums will drop. Take the difference between what you owe now as the minimum and what you owed before and add that to the amount you pay towards the card you have chosen to pay off. You will be surprised at how quickly you can pay off this card. Note the plan should remain flexible, if you receive a credit card consolidation offer add it to your credit card consolidation offer chart and see if it is something that you should consider. If it is act on it and reevaluate your payments. Note however that each time you apply for an offer a credit check will be performed and this can have a negative impact on your credit score resulting in fewer offers in the future. Therefore make sure the offer is really going to help you before deciding to act on it. By holding out for a little while, you may receive better offers because your credit is improving as your paying down the balances on your cards.

Step Five – Implement Plan and Review
This five step process is one that I recommend performing over and over again until all cards are paid off. Each time a card is paid off, repeat the process to determine which will be the next card to pay. My reasoning for this is that interest rates, offers and circumstances change therefore you need to remain flexible during your credit card consolidation.

Credit Card Consolidation Conclusion
Although the debt will not go away over night, you will be surprised at how quickly you can consolidate your credit cards. Once you start the process it gains momentum and the debt starts fading away faster and faster. I was surprised at how quickly I was able to get out from under my debt. It still took several years, but I was on the verge of bankruptcy so to be able to turn things around in three years was a very rewarding experience for me. Obviously depends on your financial situation, but if you take your budget seriously, following this step by step credit card consolidation process normally will result in elimination of your credit card debt in about three years. Return From Credit Card Consolidation Step By Step