Consolidating credit card debt is a strategy that merges credit card balances into a single payment. Preferably, your new debt should have a shorter repayment period and lower interest rate than your old credit card debts. Credit card debt consolidation also enables you to make your monthly payment more manageable.
When consolidating credit card balances, you should consider your total debt, credit score, and whether you have 401(k) savings and home equity. Once you start adopting a debt consolidation method, it’s a must to discipline yourself and take accountability with the payment of your new debt.
Your credit rating will get dragged down if you fail to pay your new debt. The hard credit check conducted by your lender may also have a negative impact on your credit score. So, if you want to know how to consolidate credit card debt, read these credit card consolidation methods below.
Using an Unsecured Personal Loan
Online lending companies, banks, and credit unions offer personal loans online for credit card debt consolidation. This borrowing option should provide you an inexpensive annual percentage rate and help you pay back what you owe faster.
Online personal loan providers allow you to prequalify for a loan without hurting your credit score. In this way, you can get an idea of the actual APR once you apply for the loan. If you have good to exceptional credit, the loan’s interest rate will be much lower. However, you may have to pay an origination fee ranging from 1 to 8 percent of the money you owe.
Banks are also the go-to lending entities for people who want to obtain debt consolidation loans. The loan amounts you can get are much higher than those offered by private lending companies. The interest rates of personal loans from banks are more competitive, especially if you have an excellent credit score.
Finally, you have credit unions that provide their members of affordable personal loans and more manageable repayment terms. Personal loans from credit unions have a maximum interest rate of 18 percent.
Credit Card Refinance
Using multiple credit cards can sometimes be a struggle when it comes to repaying them. If you find yourself in this situation, you should go for credit card refinancing. It’s a way of transferring credit card balances to a new credit card.
The good thing about credit card refinance is that card issuers offer zero percent introductory period, typically for 12 to 18 months. Fees range from 3 to 5 percent of the amount transferred when you transfer credit card balances.
Figure out whether you can get a discounted fee for this debt consolidation option before you apply for a balance transfer credit card. It’s also crucial to set a budget plan so that you can pay what you owe by the expiration date of the promotional period. There will be a regular interest rate for your outstanding credit card balance after the introductory period ends.
If you can’t get approved for a personal loan or credit card balance transfer, you can take out a loan from your 401(k) retirement plan. However, you should only consider it a last option because doing so can damage your retirement account.
One of the benefits of taking out a 401(k) loan is that it won’t hurt your credit score. However, you should make sure to make timely payments and pay what you owe in full because you can be charged with expensive penalties. This type of loan usually has a repayment period of up to 5 years.
Home Equity Line of Credit or Loan
Does your house have significant equity? If yes, you can use it as security for a credit line or loan for consolidating your credit card debts.
A home equity line of credit or HELOC allows you to take a sum of cash from a limited credit line for a specific period, lasting up to 10 years. A home equity loan, on the other hand, enables you to obtain a lump sum. The former has a variable interest rate, while the latter has a fixed interest rate.
The drawback of home equity loan and home equity line of credit is that your property may get foreclosed if you couldn’t pay your loan in full at the end of its lifespan.
Debt Management Plan
Applying for a debt management plan gives you the opportunity to consolidate your credit card debts into a more manageable and affordable payment. You don’t need a good credit score to get enrolled in a debt management program. If you have a stable income, you can avail of this credit card debt consolidation strategy.
Now you know the five ways to consolidate your credit card debts. Study the methods mentioned on this list and make sure that it suits your financial situation. Consolidating multiple credit card debts help you pay them faster and at a lower annual percentage rate.