Five Ways to Consolidate Credit Card Debt

The convenience of owning a credit card (or multiple credit cards) is that it offers a variety of rewards, credit score-building ability, security, and, above all, emergency purchasing power. Financial freedom is lucrative, but credit cards sometimes drag along the average American’s dreaded foe, debt, too. The Daily Mail reports that we have added $43 billion of credit card debt just in the second quarter of this year. This brings the approximate debt per household in the vicinity of $10,170.

Dealing with debt might be difficult, especially if you owe several creditors. Multiple credits come with multiple interest rates, sometimes costing you a small fortune. You might have considered taking loans to consolidate credit card debt. You may consolidate your accounts and perhaps save money by obtaining a lower interest rate (IR). However, this technique is not without risks, so you should educate yourself on what debt consolidation includes and how to mitigate the potential bad consequences. What do personal finance experts say? 

Let’s find out

What is a Credit Card Debt Consolidation Loan?

Anyone who uses a credit card understands that debt can rack up quickly. While regular users are generally disciplined about repayment, one could struggle to repay this debt if there was unplanned expenditure, loss of income, or financial emergencies.

Reports suggest that the current average credit card interest rate is at a long-time high of 20.69%, while the maximum Annual Percentage Rate (APR) on new offers is 27.79%. The accumulating interest from different creditors at these high rates can overwhelm a household’s finances. It is prudent to clear these debts as soon as possible. This is where a credit card debt consolidation loan could prove helpful.

A loan for credit card debt consolidation is commonly a personal loan, but you could also choose other options like a Home Equity Line of Credit (HELOC). The loan amount is equivalent to all your current credit card debts – interest included – put together. This amount can be availed at a relatively cheaper IR. The primary objectives of a debt consolidation loan are:

• Save money on high-interest debts
• Pay off individual credit card debts
• Consolidate a scattered creditor list into one IR and one monthly payment
• Simplify finances
  

Credit card debt consolidation loans are a great way to ease debt repayment pressure. They offer a simplified monthly payment scheme at a typically lower IR. Despite this, it’s not for everybody. You should consider these factors before opting for credit card debt consolidation:

Credit score: A high credit score, typically above 720, will fetch you the best IRs and most favorable terms. Some creditors could provide you with a loan despite bad or average scores, but they will charge higher rates.

Cash cover: While a credit card consolidation will likely improve your finances, you must consider the monthly payment. The new payments could be close to the amount you had been paying.

Interest rates on existing debts: Credit card interest rates change based on the user’s repayment habits. With a continuous monthly balance, you could be looking at 25-27% IR. A credit card consolidation loan could be availed at 3-36%. So, if you can secure a loan at a rate lower than your current IR, you could save thousands of dollars.

Size of the debt: A sizeable debt would be $5,000 to be paid back over six to seven months. If you can pay off a debt under six months, consider doing it without a consolidation loan. A personal finance expert could help you explore the possibilities and guide you properly.

Budgeting habits: Once you consolidate your current loans, you will save substantially and get a wide breathing space. Of course, you can keep using your credit cards. However, you cannot accumulate new debts since that will create a vicious cycle and do more harm than good. Plan a viable budget and avoid any debts once your credit card debts have been consolidated.

Balance transfers

We have discussed that personal loans are a common way to consolidate credit card debts. But, consumers must have more than one choice. With the right knowledge of personal finances, we can get down to the brass tacks of credit card debt consolidation, its methods, and the pros and cons of all.

With a balance transfer, your existing debts can be transferred to a more convenient credit card. Plenty of credit cards come with an offer of 0% APR on balance transfers for new users. Most cards will levy a transfer fee of 3-5% of the balance, but the 0% APR means no more accruing interest for the offer period.

Even if you do not avail of such an offer, choose a card that provides low APR and balance transfer facilities, and you will successfully consolidate your debts. A good to excellent credit score (700+) can guarantee a low APR on most credit cards, but the transfer can affect the scores.

Pros

• Easier management of debt
• Substantial savings
• Potential 0% APR with introductory offers

Cons

• The 0% APR will end with the offer, and normal rates will apply. You must plan for this change. Some people might benefit from long-term loans, and balance transfers might affect their finances in the future.
• Paying the one-time balance transfer fees may not be feasible for some borrowers.
• Balance transfers are better for individuals with higher credit scores. However, refinancing or using this method more than once can damage the credit score.
• The new credit limits could lure borrowers into more debt.
• This method may not be for everyone, depending on the current debt, since many creditors have strict balance transfer limits.

Personal loans

Personal loans are easier to secure. Your local bank will happily offer you a loan, and the process can be completed online.

Pros

• Personal loans are easy to secure.
• Most personal loans offer a flexible repayment plan (up to 60 months), depending on your principal.
• Some financial institutions can pay off the debt directly without you handling the amount.
• Some non-traditional lenders could also provide you with this loan.
  

Cons

• Approvals and interest rates depend on your credit score, income, total assets, and debt amount.
• New loans require some fees. While not comparable to the interest you had been paying on your debts, it could still add to your expenses.
  

Read More: Personal Loan to Pay off Credit Card Debt

Debt consolidation programs

While the basic idea remains, the same, debt consolidation programs are systematic repayment schemes run by credit counseling organizations and debt management programs. It should not be confused with debt consolidation loans but could be considered its superset.

Some non-profits also run such debt consolidation programs. Some debt consolidation programs can also help the destitute in cases of unsurmountable debt. It is best to look for trusted non-profit organizations and understand their programs before enlisting for one.

Pros

• These programs are designed for the borrower’s benefit. Meaning you can expect more support from the organization.
• The programs work with creditors to reduce or even waive certain penalties and interest rates.
  

Cons

• Some organizations can mandate the closure of some or all of your cards to ensure security.
• Debt consolidation programs may also come with some monthly fees.
  

Home equity loan

A home equity loan is as simple as getting a loan against your house as collateral. If you are a homeowner, this could be an easy way to consolidate your debts.

Pros

• The collateral allows you to get a loan at much cheaper rates.
• The interest rates are typically fixed, meaning you don’t have to worry about increased monthly payments in the future.
• Some local tax laws make the interest on a home equity loan tax-free.
  

Cons

• You run the risk of losing the collateral – your house.
• Some loan fees, like closing and maintenance fees, could reduce your savings.
• Home equity loans often have a variable IR.
  

Retirement plan loan

A 401(k) or retirement plan loan is not a loan in every sense since the retirement saving is your own money. However, it is only a last resort to severely unmanaged debts. Your employer will allow you to borrow up to 50% of your employer-sponsored retirement fund.

Pros

• A 401(k) loan does not trigger a credit score check or affect your credit score.
• Low-interest rates – interest rates are usually prime interest rates plus 1%.
  

Cons

• This kind of credit card debt consolidation loan needs extensive financial discipline since a non-repayment could have certain tax implications and could seriously upset your retirement fund.