The 5 Best Ways to Consolidate Credit Card Debt
The statistics related to credit card debt in America right now are somewhat staggering. Over half of American adults carry around debt. The average balance debt holders carry is over $4,000 and the total amount of credit card debt has climbed past $900 billion.
Considering all that, chances are good that you are a part of that statistic. If you are struggling to pay off your credit card debt, it might be because you are approaching your debt with the wrong strategy.
There are many strategies a person can employ to consolidate and reduce their debt, it’s all about which strategy works best for them. Continue reading to discover how you can take back control, consolidate, and become debt free.
Take out a Personal Loan and Consolidate
If you’re someone with less-than great debt, taking out a personal loan could be a great way to consolidate the debt on multiple cards and turning it into one debt with a fixed interest rate.
How to best use a personal loan goes as follows: use the funds that you receive in the unprotected loan to pay off any of the debts you have across your cards. Once you’ve paid off your credit card debt, take a deep breath and enjoy that weight lifting off your shoulders before quickly getting back to work to pay off the loan that got you there.
Set aside a monthly payment amount – or better yet set up an autopay – so that you can avoid late fees and avoid damaging your credit score.
The best aspects of a personal loan are that you can qualify for many without damaging your credit score. Also, payments are fixed so you’ll know exactly how much money you need to set aside for your loan each month.
The worst aspect of a personal loan is likely that the interest rate you receive on your loan can vary heavily depending on your credit score. If your credit score is below 600, you can receive a very high interest rate. Interest rates typically vary from about 3.09% all the way up to 36%.
Balance Transfer Options
This is a great option for those with great credit. In order to initiate a balance transfer you have to open a new card. Ideally, this new card offers a 0% Annual Percentage Rate (APR) period. These periods can range between 6-21 months and will give you the opportunity to save quite a bit of money if you can pay it off before the into period.
To make your balance transfer work best for you, make sure that you actually transfer the balances from the cards you have incurred debt on over to your new card because many offers are only available for the first few months of owning a new card.
Beyond that, make sure you aren’t ‘t late on payments because that could result in a cancellation of the highly helpful 0% APR period. You should also do your best to pay of the entirety of the amount before that period ends because you could the card company could potentially apply deferred interest onto your card and end up having to pay all the interest you accrued while paying off the card.
In the end, you could end up with no debt, and a new credit card that you have earned a ton of rewards on thanks to your timely payments!
Using Home Equity for Credit Card Consolidation
If credit card debt is just one of the many debts you are dealing with, one good option could be to take out a home equity loan on your house. With a home equity loan, you can borrow a fixed amount of money for a fixed amount of time with a fixed interest rate. As described by the name of the loan, your home becomes collateral. That makes this route fairly high-risk because if you default on your loan, your lender may foreclose on your home.
The amount of money you will receive will be a certain percentage of your home equity – or how much your home is worth minus how much you still owe on your mortgage. The best way to use a home equity loan to pay off your credit card debt is to use the money you get in the loan to pay it off, and then make sure you stay current with paying off your loan. Falling behind on your payments risks incurring fees, damage to your credit score, and of course a potential foreclosure on your home.
A 401(k) Loan to consolidate debt
This type of loan is fairly self-explanatory. It’s when you borrow money for your already existing 401(k) plan to pay off your debt. The amount that you can borrow is limited to less than $50,000 or 50% of your secured balance.
After you take out the loan, you will be put on a repayment plan – that includes interest charges – and you’ll typically be given five years to pay off the loan you took out. Once you get your loan, pay off your credit card debt immediately. After your debts are paid off, payments to your 401(k) will be taken from your paycheck until your loan is repaid. One of the added benefits of a 401(k) loan is that the interest you are paying on your loan is ultimately to yourself, not to a lender.
The one thing you want to be certain of is that you’ll have your job throughout the loan repayment period. If you lose your job, your loan will due in full typically within two months. If you can’t pay back the total amount, you will be taxed and could also incur added penalties.
Using a Debt Management Plan
This route is somewhat different from the others in the sense that instead of consolidating your credit card debt, it actually consolidates your credit card payments. Instead of making payments to the creditors you owe, you make payments to your debt management plan (DMP) and your credit counselor will use it to pay the debts you owe. Your counselor may even try to negotiate lower interest fees and rates on your behalf.
This option comes with quite a few challenging aspects and should be used only if you are struggling to pay the minimum payments on your card and are currently not bringing in a stable income. The best way to utilize a DMP is to complete your credit counseling session (which is required) and make consistent, on-time payments that you and your counselor set up.
Once you have set up your DMP, be aware of the fact that you likely won’t be able to use your credit cards while a DMP is active and you won’t be able to open new cards. Additionally, be prepared to pay the monthly fees that you will owe your DMP on top of the monthly payments that you are making to pay off your debt.