Consolidating your credit card debt can be a useful option to keep your head above the choppy difficulties. Credit card debt consolidation may provide you the chance to organize your credit card bills and get yourself out of multiple monthly bill payments. Also, it can help you rescue your credit score before it’s too late.
However, before choosing the credit card consolidation option, you must consider some aspects and make your final decision.
What can you consolidate?
You should know it first that your other debts can’t be added in your credit card debt consolidation plan. But you may consolidate other types of unsecured debt through different debt consolidation plans. You need to know all about credit cards and credit repair. So, in general, you may consolidate:
- Credit cards
- Store credit cards
- Unpaid medical bills
- Unsecured personal loans
- Payday loans
- Debts in collection
Now let’s check out the options available for you to consolidate credit card debts.
1. Balance transfer
The balance transfers method is the most popular credit consolidation option which may help you to transfer your credit card balances from a current credit card to a new card. Normally it comes with a 0% introductory APR which can range from 6-21 months. You may find several credit card companies who provide this introductory offer to get business from credit card users.
If you’re desperate to find some interest-free time to gather money and consolidate your credit debt, a balance transfer option is a good choice. But you need to pay off your debt before the end of the introductory period.
Pros
The 0% interest time frame can save you from compounding interest charges.
A new credit card can give you several benefits in terms of rewards, discounts, o% interest charge for new purchases, and improve credit score if you use the new card responsibly.
Cons
This option requires a credit score equal to or more than 700 to execute. Some balance transfer cards may charge a balance transfer fee. You need to pay off the debt within the 0% introductory period, else you’ll have to pay much higher interest later.
2. Credit card consolidation loan
You can take out an unsecured personal loan a.k.a credit card consolidation loan from your bank, credit union, or an online lender. You may also use that loan to consolidate other unsecured loans. The loan interest will be lower than your existing credit card or other debts.
Credit unions will offer flexible loan terms and lower interest rates to borrowers with a low credit score. The maximum APR at a federal credit union is 18%.
Online lenders might offer the lowest rates to the borrowers having good credit. The highest rate might top out at 36%.
Pros
A personal loan has a fixed interest rate and monthly payment. It also has a fixed payment period.
Cons
Lowest rates can be available to borrowers with an excellent credit score. You may also carry an origination fee.
3. A loan is taken from a qualified retirement account
You might have saved a good amount of money in a retirement account, such as an employer-sponsored 401(k) or an IRA. You might use these funds to consolidate your debts entirely. A 401(k) loan is when you borrow money from your existing 401(k) plan. This amount you may withdraw is limited to a minimum of $50,000 or 50% of your invested balance.
Pros
There’s no credit check necessary for this loan. A qualified 401(k) will not charge you an early withdrawal penalty in special cases.
Cons
You might lower your retirement savings if you take out a loan from there. Also, you may have to pay income taxes and an early withdrawal penalty if you are younger than 59 ½.
You should pay back the loan within five years unless you’re going to buy your primary home.
4. Home equity loan
Home equity loans are one of the easiest ways to gather money to consolidate your credit cards. By using your existing home equity, you are getting a fixed interest loan, for a fixed amount of time. The credit criteria are low as you are using your home as collateral. if you default on your loan, the lender may foreclose on your home.
A home equity loan may provide you with a large sum of money to manage all of your debts, but if you fail to pay the loan, you might lose your home. So, it’s better to use that option if you don’t have any other choices left.
Pros
Home equity loan has longer terms and lower rates of loans. Lenders might cap home equity loans at 85% of the equity, but the loan amount might be larger to cover all of your debts.
Cons
Your loan will be secured by your home, so if you don’t pay loan payments, your home will be taken away by the lender. Also, apart from the origination fee home equity loan comes with multiple fees compared to a personal loan. There are additional fees like an appraisal fee, application and processing fee, and many more.
5. Borrow money from your dear ones
You may ask monetary help from your friends, family members, or from your relatives, and use that fund to pay off credit cards. Do not opt for a personal loan, or a home equity loan initially. Ask your parents to guide yourself.
Pros
This kind of loan does not require any credit check. The interest rate (if any) will be lower than any conventional loan. There will be no strict rules to pay any monthly payment. If you fail to make payment any month, your father wouldn’t sue you or charge you more interest…isn’t it?
Cons
You’re putting your personal relationships at risk. If you do not pay the loan or fail to make monthly payments, your relatives, or family members may lose faith upon you.
6. Work with a nonprofit credit counseling company
A nonprofit credit counseling company may offer you advice and help to create plans for paying off your debts. Search for a National Foundation for Credit Counseling (NFCC) accredited company, read online reviews, check BBB rating, if you’re considering one. They may help you to consolidate your credit cards with affordable monthly payments.
Pros
You may be able to set up a debt management plan directly with the help of a credit counseling company. You might have to pay one payment each month, which in turn pays each of your creditors.
Sometimes, the credit counseling company may negotiate lower interest rates or monthly payments on your behalf.
Cons
A credit counseling company may charge a small fee to get set up a payment plan. Also, some of these companies may ask you to close your credit cards once they are paid off. Closing old cards may also wipe out all the credit history and this might hurt your credit score.
Conclusion
There are various options to consolidate credit card debt, but you should choose the method that is right for you. Choosing the best credit card consolidation method might depend on a variety of factors, including how much credit card debt you currently have, your credit score, and your current financial situation as well. Also, read some other better financial option for consumers.
Keep all of these factors in mind and select the option that suits your requirements.