Consolidate Credit Card Debt: 6 Options for Credit Card Consolidation
For the 191 million credit cardholders in America, the use of credit cards has made acquiring things easier. The fact that it can also be a financial problem in the form of debt can’t also be denied. As of the last quarter of 2020, credit-card loans reached $820 billion. If you’re one of those with credit card debt woes, know how to consolidate credit card debt fast by applying these methods.
What is Credit Card Consolidation?
Consolidating credit cards applies to those cardholders owning more than one credit card. Credit card consolidation refers to any solution that takes multiple credit card balances and combines them into a single monthly payment.
The main goal is to reduce or eliminate the interest rate applied to the balance. Doing this makes it faster and easier to pay off credit card debt. As you are aware of, you pay interest on every payment. Instead of wasting money on interest charges, you can focus your money on paying off the principal amount you owe.
In many cases, you can get out of debt faster, even though you pay less each month. Credit card consolidation essentially gives you a more efficient way to eliminate debt.
How does Consolidating Credit Card Debt Work?
For the credit card consolidation to work, you have to take a new credit product and apply for one.
Firstly, look around and compare lenders.
Talk to your current bank or credit union, or research lenders online. Most financial institutions will have several options that could work for you, including balance transfer credit cards or personal loans.
Remember: Not everyone will qualify for a debt consolidation loan. As always, you may need a good to excellent credit score to be eligible for some options.
Pay off completely old credit cards.
If you are qualified for a new credit card debt consolidation loan, use the money you receive to pay off your previous credit card balances. You can also transfer your balances onto your new credit card. In some cases, your bank may send you checks you can use to pay off your current balances. This process leaves you with just the new loan and the new monthly payment.
How to Consolidate Credit Card Debt: Consider These 6 Good Options
Your new credit card debt consolidation is ideal if the new debt has a lower annual percentage rate than your credit cards. Doing this reduces interest costs and makes your payments more manageable or shorten the payoff period.
The best way to consolidate credit card debt will depend on how much debt you have, your current credit score, credit report, and other information. Here are some effective ways or methods to consolidate credit card debt:
- Getting a credit card consolidation loan
- Refinance with a balance transfer credit card
- Use your home equity.
- Consider 401(k) savings or retirement plan
- Start a debt management plan
- Using auto loan equity
Personal Loans / Credit Card Consolidation Loan
You can get an unsecured personal loan accounts from a credit union, bank, or online lenders to consolidate credit cards or other types of debt. Ideally, the loan will give you a lower APR on your debt.
Credit unions are non-profit lenders that offer their members more flexible loan terms and lower rates than online lenders, especially for borrowers with fair or bad credit (689 or lower on the FICO scale). The maximum APR charged at federal credit unions is 18%.
Bank loans provide competitive APRs for good credit borrowers, and benefits for existing bank customers may include larger loan amounts and rate discounts.
Often the four big metrics used in lending are income, credit score, total assets, and total debts. Some lenders add in a few nontraditional metrics in their loan approval process. During this process, metrics such as educational level, length of current residence, and job history can lead to approval compared to bank loans. This is useful for newer borrowers who may not have a robust credit profile established.
Advantages of personal loan:
- Fixed interest rate means your monthly payment won't change
- Low APRs for good to excellent credit
- Direct payment to creditors offered by some lenders
Disadvantages of personal loan:
- Hard to get a low rate with bad credit.
- Some loans carry an origination fee.
- Credit unions require membership to apply.
Get a Balance Transfer Card
Also called credit card refinancing, this option transfers credit card debt to a balance transfer credit card that charges no interest for a promotional period, often 12 to 18 months. You'll need good to excellent credit (690 or higher on the FICO scale) to qualify for most balance transfer cards.
A good balance transfer card will not charge an annual fee, but many issuers charge a one-time balance transfer fee of 3% to 5% of the amount transferred. Before you choose a card, calculate whether the interest you save over time will wipe out the cost of the fee.
Aim to pay your balance down completely before the 0% intro APR period is over. Any remaining balance after that time will have a regular credit card interest rate.
Advantages of this consolidation method:
- 0% introductory APR period.
Disadvantages of this consolidation method:
- Requires good to excellent credit to qualify.
- Usually carries a balance transfer fee.
- Higher APR kicks in after the introductory period.
- Best balance transfer credit cards
Refinancing Your Mortgage / Home Equity Line of Credit (HELOC)
For homeowners, this is good news! You may be able to take out a loan or line of credit on the equity in your home. You can use it to pay off your credit cards or other debts.
The home equity loan is a lump-sum loan with a fixed interest rate, while a line of credit works like a credit card with a variable interest rate.
A HELOC often requires interest-only payments during the draw period, which is usually the first 10 years. That means you'll need to pay more than the minimum payment due to reduce the principal and make a dent in your overall debt during that time.
Since the loans are secured by your house, you're likely to get a lower rate than what you would find on a personal loan or balance transfer credit card. However, you can also lose your home if you don't keep up with payments.
Advantages of this credit card consolidation method:
- Lower interest rates than personal loans
- It may not require good credit to qualify
- A long repayment period keeps payments lower
Disadvantages of this consolidation method:
- You need equity in your home to qualify, and a home appraisal is usually required.
- Secured with your home, which you can lose if you default
- The pros and cons of using home equity to consolidate debt
Getting a 401(k) Personal Loan
If you have an employer-sponsored retirement account like a 401(k) plan, it's not advisable to take a loan from it. Doing this can significantly impact your retirement.
Consider this method only after you've ruled out balance transfer cards and other types of loans.
One good thing about this method is it won't show up on your credit report. This means there's no impact to your credit score. However, it also has disadvantages. If you can't repay, you'll owe a good amount of penalty plus taxes on the unpaid balance. Worst case scenario, you may be left struggling with more debt.
Typically, 401(k) loans are due in five years, unless you lose your job or quit. They're due on tax day of the next year.
- Lower interest rates than unsecured loans.
- No impact on your credit score.
- It can reduce your retirement fund
- Heavy penalty and fees if you can't repay
- If you lose or leave your job, you may have to quickly pay back your loan
Debt Management Plan
Debt management plan is the method of rolling several debts into one monthly payment at a reduced interest rate. This works best for those who are struggling to pay off credit card debt but don't qualify for other options because of a low credit score.
Unlike some credit card consolidation options, debt management plans don't affect your credit score. If your debt is more than 40% of your income and can't be repaid within five years, then bankruptcy may be a better option.
- Fixed monthly payments
- May cut your interest rate by half
- Doesn't hurt your credit score
- Startup fees and monthly fees are common
- It may take three to five years to repay your debt
Equity in Owned Vehicles
If you own a vehicle that is completely paid off or has a low remaining balance to pay, this can be an option. Using your vehicle as collateral in a loan, it would allow you to get a loan to pay down others. In this matter, you gain the ability to receive an auto loan rate which is typically much lower than an unsecured personal loan.
The disadvantage here would be a limitation of the loan being capped at the value of the vehicle. Also, when carrying an auto loan, most lenders require full auto insurance coverage on the vehicle, which could increase the monthly expenses. This method is a great way to leverage an asset to obtain a lower loan rate.
- Receive a lower auto loan rate
- Loan amount limited only to the vehicle’s value
- Lenders require full auto insurance coverage
Will a debt consolidation loan hurt my personal credit score?
It depends. Applying for a debt consolidation loan may temporarily dent your credit score because the lender will have to do a hard credit check before it can approve you. However, if you make your monthly loan payments on time and don't rack up card balances again, a credit card consolidation loan can improve your credit score.
As mentioned, there are options that doesn’t hurt your credit score. Personal loans for debt consolidation have several features that are less likely to damage your credit than revolving debt like credit cards. A personal loan is an installment loan with a fixed rate, fixed monthly payments and a fixed payoff date. This makes them easier to budget for and a cheaper form of credit than credit cards, which have variable interest rates, payments that change depending on the rate and balance and no clear payoff date.
The fact that many people take out installment loans to pay off their revolving loan balances says a lot about the potential credit benefits of debt consolidation loans.
A final say on credit card debt...
It is true that having a credit card offers convenience. There are certain benefits to owning a credit card such as reward programs: may it be free miles or cash backs. Owning one makes people have things and pay it on a later date. However, when you overspend and end up in debt, it can be pretty stressful and the benefits outweigh it.
If you’re suffering from credit card debt, there are several options you can choose from. Some options may be better based on your current needs and circumstances. It is best to choose what’s the most convenient to you in order to pay off your debt effectively. When choosing the credit company, always remember to choose the one that offers a lower interest rate compared to your current credit cards.
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