It’s possible to consolidate credit card debt in several ways, but the key is to choose the option that works best for your situation. To determine which path to take, consider factors such as how much debt you have to repay, your current interest rates and your personal credit history. You can consolidate your credit card debt through any of the strategies detailed next. One option is to utilize a personal loan to use as a debt consolidation loan. This involves the process of taking out a new loan to pay off multiple unsecured loans, including credit cards. Getting a personal loan is a popular method of consolidating credit card debt because it provides borrowers with a fixed interest rate and repayment period. 1. Apply For A Personal Loan
With a debt consolidation loan, you borrow the amount of money needed to repay your outstanding credit card balances, then pay preset monthly installments, plus interest, for the life of the loan. The loan amount and interest rate are based largely on the borrower’s credit score, which must be in “good” standing to qualify. Borrowers can apply for a personal loan through banks, credit unions and online providers of loan options.
2. Use A Balance Transfer Credit Card
A balance transfer credit card provides financial relief by allowing borrowers to move balances from one or more credit cards to a card with a lower interest rate. While a balance transfer doesn’t erase the debt owed, it allows borrowers to pay down their balance faster with a lower annual percentage rate (APR). Most major credit card companies grant balance transfers, and some even extend low-interest introductory or 0% APR offers to borrowers with satisfactory credit.
The best way to utilize a balance transfer credit card as a debt consolidation tool is to make all monthly payments on time and pay more than the minimum balance. That way, you can avoid accruing interest at the card’s regular APR after the special introductory period ends.
3. Work With A Credit Card Counselor
Credit counseling is a service typically provided by nonprofit agencies staffed by professionals certified in money and debt management, budgeting and consumer credit options. If you decide to go this route, be sure to do your research and find a reputable counselor. Also, make sure you understand any fees you’ll have to pay for the counselor’s services.
Once a credit counselor has examined the details of your financial situation, they’ll help you create a personalized debt management plan to consolidate your credit card debt. Their goal is to roll several outstanding debts into one lower monthly payment that you’ll pay directly to the credit counseling service, which will distribute funds to each creditor on your behalf. Credit card counselors can also help you negotiate lower interest rates, stop calls from collection agencies and potentially convince creditors to waive late fees.
4. Apply For A Home Equity Loan
In some situations involving credit card debt, borrowers may choose to take out a home equity loan1 to cover the cost of their high-interest debt. A home equity loan allows homeowners to borrow against the equity they have in their home and then pay it back over the next 5 – 15 years.
Homeowners can determine how much equity they have in their home by subtracting what they still owe on their mortgage from the current value of the home. For example, if your home is worth $350,000 but you owe $100,000 on the mortgage, you have $250,000 in equity. Your home equity loan lender likely won’t let you borrow the full amount, though.
While a home equity loan is a relatively low-cost option for financing a home improvement project or another major purchase, it’s only recommended as a debt consolidation strategy in rare situations.
You could also look into getting a home equity line of credit (HELOC), which works similar to a home equity loan but in the form of a credit line.
5. Use Your 401(k) Savings
Similar to taking out a home equity loan, dipping into your 401(k) savings is a high-risk option for credit card debt consolidation. It’s important to recognize that taking out a 401(k) loan before you reach the eligible age of 59 ½ will result in early withdrawal penalty fees, reduce your retirement fund and lead to other potential fees if you don’t repay the money on time.
With that in mind, a 401(k) loan can be an option for consolidating credit card debt if you’ve exhausted all other options. This tactic leads to a lower interest rate than other unsecured loans, plus the action won’t show up on your credit report or affect your credit score.
