Drowning in high-interest credit card debt? You’re not alone. Americans hold over $1 trillion in revolving credit card debt, according to the Federal Reserve. And the average household that carries balances owes over $6,088 on their cards.
Now, if you’re struggling to keep up with minimum payments and high interest charges each month, you might want a strategy to help you get out of that debt. Otherwise, it might spiral into serious financial problems in the future.
Consolidating and paying off your credit card debt may provide the much-needed relief. But do you know how to consolidate credit card debt? Well, no need to panic. This piece explains how to combine all credit card balances effectively and make repayment more manageable.
But first,
What is Credit Card Debt Consolidation?
Credit card debt consolidation simply means combining multiple high-interest debts into one single loan or payment plan with a lower interest rate. The goal is to save money each month on interest, allowing you to pay down the principal balance faster.
Consolidating revolving credit card balances into a fixed loan or line of credit with a set repayment schedule also helps simplify and organize payments. Rather than tracking multiple due dates and scrambling to make multiple minimum payments, you’ll have just one monthly payment.
How to Consolidate Credit Card Debt
If you have good credit, you have several options for consolidating credit card debt at lower interest rates. And even if your credit isn’t great, you still have possibilities.
Let’s review some of the most popular methods of credit card consolidation:
1. Balance Transfers
One of the easiest ways to consolidate credit card debt is to transfer balances from high-interest cards to a card offering an intro 0% APR promotional period. For example, you may be able to transfer balances to a card with 0% interest for 12-21 months. This interest-free period allows you some breathing time, helping you save and repay your accrued debt.
However, the secret here is to ensure you pay off the balances in full before the intro period expires to avoid deferred interest. And watch out for balance transfer fees, usually 3-5% of the amount transferred.
This is an ideal method for you if you are seeking how to consolidate your credit card debt without hurting your credit score. That’s if you are transferring to a credit card that does not require a credit check.
2. Personal Loans
Borrowing a personal loan to pay off credit card debt is another credit card debt consolidation strategy. Personal loans typically have fixed rates and terms of 1-7 years. Rates are often considerably lower than credit card interest rates, especially for borrowers with good credit. For instance, while most credit card APRs are above 20%, a personal loan might charge as low as 7%.
And the best thing? You’ll repay the loan in fixed monthly installments until it’s paid in full. This can simplify the repayment process. Just beware of prepayment penalties with some lenders.
3. Home Equity Loans
If you’re a homeowner with sufficient equity available, a home equity loan may offer the lowest interest rate for consolidating credit card debt.
Interest rates are comparable to mortgage rates, currently starting around 5-6% for prime borrowers. And you can deduct the interest on up to $750,000 in home equity debt on your taxes.
Just keep in mind this option puts your home at risk if you default. Home equity products also involve closing costs and could be difficult to qualify for if you have limited equity.
4. HELOCs
A home equity line of credit (HELOC) combines the features of a home equity loan with the flexibility of a credit card or revolving line.
With a HELOC, you have access to a revolving credit line up to your credit limit. So you can draw as needed to pay off credit cards, then repay over 10-20 years. Interest rates are variable but generally pretty low, currently at an average of 9%.
HELOCs don’t have closing costs and may be easier to qualify for than home equity loans. Just know that rates can rise over time, increasing your monthly payment.
5. Debt Management Plans
If your credit is less-than-ideal, a debt management plan through a nonprofit credit counseling agency may help consolidate your credit card payments.
In a DMP, the counselor negotiates lower interest rates and monthly payments with your creditors. You then make one monthly payment to the agency, which disburses payments to the creditors.
The downside is that it can damage your credit initially. Creditors may also refuse to work with the agency. Lastly, enrollment and monthly administration fees also apply.
6. Retirement Plan Loans
Your retirement plans might also come to your rescue. If you have a 401(k) or other retirement savings, you may be able to borrow against it to pay off credit card debt. Here, interest rates are typically 1-2% above the prime rate. And you essentially pay interest to yourself rather than creditors.
Just be sure to set up automatic payments from your checking account to repay the loan on time. Otherwise, you risk taxes and penalties and endanger your retirement nest egg. Retirement plan loans should be a last resort option.
7. Peer-to-Peer Lending
Last but not least, peer-to-peer lending sites like LendingClub allow you to obtain personal loans funded by individual investors. Minimum credit scores start around 600, and interest rates are often lower than traditional banks and credit unions.
This can provide reasonably priced consolidation loans for some borrowers with less-than-perfect credit. However, ensure you compare multiple lenders to find the best rate with the lowest fees. You don’t want to move from a high-interest debt into an even higher one.
Pros and Cons of Credit Card Debt Consolidation
Is consolidating credit card debt good or bad? Here are some of the pros and cons:
Pros
On the bright side, combining multiple debts into one can simplify your finances and potentially lower your overall interest rate. This means you may save money on interest payments and find it easier to manage your debt with a single monthly payment.
Plus, it could help improve your credit score by reducing your credit utilization ratio if you keep your credit card accounts open after consolidating.
Cons
There are also drawbacks to consider. Consolidating your debts might require you to take out a new loan or open a balance transfer credit card, both of which could come with fees or higher interest rates in the long run.
Additionally, if you’re not careful, consolidating could tempt you to accumulate more debt, leading to a larger financial burden. And if you close your old credit card accounts after consolidating, it could shorten your credit history and potentially lower your credit score.
The Bottom Line
If you’re serious about tackling credit card debt, explore consolidating high-interest balances into a single fixed-rate installment loan or line of credit. This can help streamline repayment and save substantially on interest charges over time.
Just be sure to compare various options to identify the lowest interest rate and fees. Also, commit to paying off the consolidation loan responsibly over time. With some discipline and smart planning, consolidation can offer a path to becoming credit card debt-free.
