By consolidating credit card debt, you can save hundreds or thousands in interest and pay off your balances quicker. But, first, let’s take a closer look at how credit card consolidation works.
What is Credit Card Debt Consolidation?
You have a mountain of credit card debt and struggle to make the minimum payments. Or maybe you’ve been paying the minimum for several months, but the balance doesn’t seem to be moving, and you’re fed up. If you can relate to either scenario, credit card debt consolidation could be ideal for you.
By consolidating your credit card debts into a debt product with a lower interest rate, you can save a bundle on interest. Even better, you can pay off your balances faster.
How Debt Consolidation Works
Debt consolidation involves using a new form of debt, like a loan or credit card, to pay off your existing debts. In essence, you’re merging all your debt obligations into a single product, hence the term “consolidation. But you also have the option to consolidate a single debt by moving the outstanding debt to another debt product with more favorable terms.
Should You Consolidate Your Credit Card Debt?
While there are benefits to consolidating your credit card debt, this method is not for everyone. Here are some factors to consider before making your decision:
- Your credit health: Most debt consolidation loans and credit card products with low interest rates require good or excellent credit. If your credit score is low, you can take steps to improve it before applying. Or you can explore debt relief programs to get help sooner than later with your outstanding credit card balances.
- Current status of your credit cards: Are your credit cards current or delinquent? If it’s the latter and late payments have already been added to your credit report, you may have a tough time getting approved for a debt consolidation loan or credit cards with favorable terms. But if any of your accounts are less than 30 days delinquent, you have time to bring them current and avoid adverse credit reporting. However, expect to pay a late payment fee.
- Your spending plan: Is there room in your budget for monthly debt payments for the debt consolidation product you’re considering? Be mindful that the monthly payments for a debt consolidation loan or credit card product could be higher than the sum of your minimum monthly payments.
- The amount you owe: If you’re in over your head and can barely make ends meet, a debt settlement program or bankruptcy may be more viable options. But first, consider signing up for credit counseling from a reputable non-profit organization to discuss your situation and determine if debt consolidation could work for you.
How to Consolidate Your Credit Card Debt
There are several ways to consolidate your credit card debt. You can apply for a credit card consolidation loan, personal loan, home equity line of credit, home equity loan, or balance transfer credit card. But if you’re desperate to find relief and are having trouble keeping up with your credit card payments, you can enroll in a debt relief program to get the help you need.
4 Ways to Consolidate Credit Card Debt
Below are five common ways to consolidate credit card debt, along with the benefits and drawbacks of each, to help you make an informed decision.
1. Personal Loan
Credit card consolidation and personal loans are other effective ways to consolidate your credit card debt. You can use the loan proceeds to pay off your credit cards, which can help boost your credit score. Another benefit is the fixed monthly payment and a lower interest rate, which allows you to repay what you owe in three to five years and save a ton on interest.
For example, if you have three credit cards with a $500 balance and 15.9% interest rates, the minimum payment on each would be $24 (or a total of $72 per month). As a result, you will spend 37 months paying off the balances and $381.30 in interest. However, if you take out a 24-month consolidation loan for $1,500 with a 5% interest rate, your total monthly payment will drop to $66, and you will only pay $79 in interest.
The major drawback of a personal loan is the risk of incurring more debt than you started with. So, it’s important to avoid using the credit cards once you pay them off.
2. Home Equity Line of Credit or Loan
Do you have equity in your home? You can tap into your home’s equity through a home equity line of credit (HELOC) or home equity loan to consolidate your credit card debt. These products boast far lower interest rates than the APRs that accompany most credit cards but are generally only available to consumers with good credit.
However, you risk your home being foreclosed if you default on your payments. Closing costs and other fees also apply to these loan products, so it’s best to consult with a mortgage lender before moving forward.
3. Balance Transfer Credit Cards
This option is best for consumers with good or excellent credit. If you’re approved for a balance transfer credit card, you will generally have 6 to 18 months to carry a balance without paying interest. So, you can transfer balances from your high-interest credit cards and create a plan to pay the balance on the new credit card before the promotional period lapses.
Some cards also assess a balance transfer fee of 3% to 5%, but this is a small price to pay to save hundreds or thousands of dollars in interest. Also, be sure you have the means to make the monthly payments to pay off the balance, or you’ll be on the hook for a hefty balance once APR is assessed. You also risk incurring even more debt than you had before if you’re not disciplined enough to refrain from using the cards you paid off when you opened the new balance transfer credit card.
4. Debt Relief Program
If your credit score is low, a debt management plan or debt settlement program could work for your situation. Non-profits offer debt management plans, and their debt counselors work with your creditors to secure more favorable terms, like reduced interest or monthly payments, on your unsecured debts. But debt settlement programs are offered by for-profits and allow you to get rid of debt n about three to five years by settling your balances.
Unfortunately, settling your debts could mean bad news for your credit score. Debt management doesn’t have the same negative impact but can be costly and take longer to eliminate your debts.
