How to Consolidate Credit Card Debt
Consolidating your credit card debt could save you money and make your life easier, but how do you do it? Just follow this simple guide.
Anyone who owes money on credit cards knows that this type of debt can be difficult to manage. Not only are the interest charges generally high, but you may also owe multiple lenders and have to juggle multiple monthly payments. Consolidation is often the solution to facilitate repayment, but you need to know how to consolidate credit card debt to avoid worsening a bad financial situation.
This comprehensive guide will provide you with the answers you need to help you use debt consolidation to reduce interest and make paying off your debt much easier.
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What Is Credit Card Debt Consolidation?
Credit card debt consolidation involves paying off existing credit card debt by borrowing from a new lender. You can take out a credit card consolidation loan to pay off multiple existing creditors. Or, you can take out a new loan to pay off a single card with an outstanding balance.
The goals of credit card consolidation include:
- Reduce your interest rate: Ideally, the new loan you take out to pay off existing credit card debt should have a lower interest rate than the existing debt.
- Make debt repayment more convenient: When you owe money on multiple cards and consolidate your debt, you’ll only have one monthly payment to make instead of several.
You can also use credit card consolidation to lower your monthly payment. The amount owed each month on your new loan is often on top of a less than minimum payment owed from all of your existing creditors. However, if this is financially feasible, you may want to continue making those higher monthly payments to pay off your consolidated debt faster.
Why You Should Avoid Debt Consolidation Loans
When you begin to consider your credit card consolidation options, you will likely come across loans specifically marketed as “debt consolidation loans”. While this type of financing may at first glance seem like what you are looking for, the reality is that these loans often don’t have great terms and sometimes they are scams.
Instead of taking out a loan specifically for people looking to pay off debt, you might be better off exploring alternatives like 0% balance transfer credit cards or personal loans. A 401 (k) loan or home equity loan may also be an option for your situation, but using the latter two types of financing comes with big risks.
How to intelligently consolidate credit card debt
To find the right type of financing for a debt consolidation loan, there are a few key factors to consider when comparing loan options:
- What is the new interest rate? Interest is the cost you will have to pay for the new loan. The interest rate on any consolidation loan should be lower than the rates you were charged on your credit cards. Otherwise, the consolidation will cost you money instead of helping you save.
- What is the repayment term? The time you have to pay off the consolidation loan is important. The longer the repayment term, the lower your monthly payments, but the more total interest you will pay.
- How much is the monthly payment? You have to make sure that it is affordable. Often times, it will be lower than the minimum payments you paid before.
- Can you qualify? You will usually need proof of income and reasonably good credit to qualify for debt consolidation. If you cannot qualify on your own, you can get help from a co-signer.
It can also help to think about how quickly you can get the new financing to pay off your old debt. It can take several weeks for a personal loan or home equity loan to be approved, but you may be able to instantly get approved for a credit card with balance transfer and quickly transfer credit card debt. existing credit to the new card.
What Are Your Credit Card Consolidation Loan Options?
You have four main options for consolidating your credit card debt.
- Balance Transfer Credit Cards: A balance transfer credit card is a card that offers a special promotional rate, such as 0% interest for 12 months or 18 months. You can transfer existing credit card debt from multiple cards to your new balance transfer cards. You’ll need to apply for a card – which can be done online – and the amount you can transfer is limited depending on the line of credit you’re approved for. You usually pay a nominal fee, like around 3% of the transferred balance, but some balance transfer cards don’t have this fee.
- Personal loans: Personal loans can be obtained from local or national banks, online lenders, or peer-to-peer lending networks. Interest rates are generally much lower than credit card rates, but you’ll pay more interest than with a balance transfer card. You will work out your repayment terms with your lender, including how much you have to pay monthly and the total amount you will pay in interest. Often, it takes several years to pay off a personal loan.
- Home equity loans or lines of credit: If you have equity in your home, which means you owe less than your home’s value, you can borrow against the equity with a home equity loan or line of credit. You can use the loan proceeds to pay off credit card debt. Your interest rate will be lower than that of a personal loan because it is secured debt. But, because your house must be used as collateral to secure the loan, you are putting your house at risk if you cannot pay off your debt.
- 401 (k) loans: A 401 (k) loan involves borrowing against your retirement accounts. You can borrow the lesser of 50% of your 401 (k) or $ 50,000, provided your plan allows you to borrow. You will be paying yourself interest with this approach, rather than paying a lender. But, if you don’t repay the loan within five years according to the payment terms, the money you borrowed will count as a distribution and you will owe income tax and a 10% penalty. If you quit your job because you quit or are made redundant, you may need to repay the full balance immediately, usually within 30 to 60 days.
There are pros and cons to each approach, but many borrowers find using balance transfer credit cards to be the cheapest and easiest approach. The big downside to balance transfer cards is that your interest rate will increase dramatically after the initial 0% promotional period ends. If you can’t pay off your debt in full by then, you should try to transfer the balance again or take out some other type of loan to pay off what’s owed so that you don’t pay a fortune in interest.
Credit Card Debt Consolidation Can Save You A Lot Of Money
Credit card debt consolidation is worth it if you owe a lot of money on your cards because of the substantial savings that consolidation can provide.
If you owe $ 4,000 on a 17% interest card with a monthly payment of $ 100 and $ 2,000 on another 24% interest card with a payment of $ 75, you will save $ 1,951.47 by interest if you kept the same payments and transferred the debt to a new card with a 3% balance transfer fee, 0% APR for 12 months, and a regular 15% APR thereafter. It would take 39 months to pay off the balance, meaning you would pay interest after the promotional rate expired. If you transfer the remaining balance at the end of the promotional period to a new balance transfer card, you will save even more.
Making a credit card balance transfer is super quick and easy and the whole process can usually be done online. That’s why it’s worth figuring out how to consolidate credit card debt so that you can stop paying exorbitant interest and get out of debt faster.