Credit cards are an excellent tool for numerous benefits, like earning rewards such as cashback or miles for travel. They provide an emergency source of cash and can help lay the foundation for building a good credit score for future purchases such as a car or home.
However, managing credit card debt can be stressful, particularly if you fall behind on bills and are watching interest charges build up. Planning and executing strategies to pay off these debts can be challenging, but they are achievable.
With multiple methods to consolidate and pay down these debts, the best strategy may differ from person to person. Today, we explore some common and uncommon ways you can approach consolidating your debts.
What Is Credit Card Consolidation?
A credit card consolidation is a process in which multiple credit card balances are collapsed into one balance. Consolidating your credit card makes it easier to track since there is just one monthly payment and due date to be concerned with. These consolidation strategies often come with a lower APR that will save on total interest paid, allowing you to pay off the balance quicker.
What Is a Credit Card Debt Consolidation Loan?
Credit card consolidation loans occur when a new loan is taken out to pay down your existing debts. For example, let’s say you have three credit cards with balances of $1,000 each. A consolidation loan would be taking out a loan for $3,000, paying off your three $1,000 balance credit cards and now just having a singular loan for $3,000.
How Does Credit Card Consolidation Work?
The consolidation process is simply straightforward. You can simply gather all the debts that you want to combine into a single payment. From there, a loan or plan is fixed for you to make your monthly payment to one location, making it easier to keep track of the due date, along with hopefully having a lower APR to pay overall.
With this in mind, let’s cover some consolidation strategies that may be accessible to you. By no means is this a complete list, but it may offer some ideas you may not have considered before.
How To Consolidate Credit Card Debt
There are several ways to consolidate credit card debt, but the most popular ones are personal loans, debt consolidation programs, and 0% introductory APR offers from balance transfer credit cards.
Personal Loans
One of the most popular methods for credit card debt consolidation is to reach out to your local bank or credit union and request a personal loan. In most cases, the application process can be completed over the phone or online.
The interesting features of these loans are that they often offer flexible terms (typically 12 to 60 months) and establish a consistent month-to-month payment due, which assists in budgeting. As a bonus, some financial institutions will make a payment directly to the creditors, saving you the bottleneck.
Bear in mind that your personal loan interest rate will likely be determined by the loan term and your credit score. Some loans may also be subject to origination fees, which add to the overall cost of the loan.
In most instances, the four big metrics used in lending are income, credit score, total assets and total debts. Others consider factors such as educational level, length at current residence, and job history.
Debt Consolidation Programs
A debt consolidation program is usually a service for borrowers where your credit cards are combined into a single payment. From there, you usually make a single payment to the program, which would then forward the payment to your creditors.
In most instances, your program’s monthly payment is less per month than making all of your payments individually. That also means that more of the payment goes towards paying down your existing debts. Debt consolidation programs work with your creditors to help reduce interest rates on debts and eliminate varying fees such as late fees, though neither is promised. Some debt consolidation programs may require the closure of some or all of the cards that you are consolidating, so be sure to double-check if your goal is to keep your cards.
0% APR Offers on Credit Cards
Many credit cards offer an introductory offer of 0% APR on balance transfers for a limited amount of time after opening the card. While they still may be subject to balance transfer fees (typically 3% to 5% of the balance being consolidated), they often offer 0% introductory periods between twelve and eighteen months to not worry about the balance accruing any additional interest.
The downsides to balance transfer credit cards are the credit limit given and being limited to only the intro period before interest starts to accrue. For some people, spreading payments over a longer time period may be more beneficial, even if it requires paying some interest. It’s recommended that you have good to excellent credit if you’re considering applying for a credit card that offers a 0% introductory period.
Second Mortgage or HELOC
If your home has appreciated in value over time or the balance has been paid down a fair amount, using your home could be a way to consolidate your debts. Taking out a second mortgage or using a home equity line of credit (HELOC) is effectively using your home as collateral in order to pay off other debts.
Since there is an underlying asset for these loans, the rate is often lower than what you would get with a personal loan, making either the monthly payments smaller or avoiding higher interest rates with other methods. The lower interest rate may give you the ability to pay down the balance more quickly. There could be additional mortgage-related expenses when taking this route, so a direct inquiry to your lender is a must.
401(k) Loan
Ideally, a 401(k) loan should be your last resort for debt consolidation. Although taking out a loan against your employer-sponsored 401(k) is a way of getting a lower rate than a personal loan, and this can help your overall credit profile.
Taking out a loan from your own 401(k) doesn’t require a credit check, so it shouldn’t affect your credit score or require credit of any specific level. Meanwhile, the debts you pay off with the loan may help improve your credit rating over time.
Just understand that leveraging your 401(k) reduces your retirement fund, and hefty fees may be assessed if you’re unable to pay back the loan. The payback time may also be accelerated if you were to lose or change jobs.
Peer-to-Peer Lending
Peer-to-peer lending is another way to access funds for a consolidation loan. Peerform, a marketplace lending platform, brings together those seeking loans with those willing to invest. The idea is to create a “win-win” situation. The borrowing to consolidate debts into one easy monthly payment and an investor seeking a steady and worthwhile return on investment.
Equity in Owned Vehicles
If you have a vehicle that is paid off or has a low balance in comparison to what it is worth, this could be an interesting route to take. Taking a loan out using your vehicle as collateral would allow you to pay down your other creditors. In this situation, you gain the ability to receive an auto loan rate which is typically much lower than an unsecured personal loan.
The downside here would be a limitation of the loan being capped at the value of the vehicle. Also, when carrying an auto loan, most lenders require full auto insurance coverage on the vehicle, which could increase the monthly expenses if they usually carry personal liability and property damage (PLPD) insurance. That said, this is another way to leverage an asset to obtain a lower loan rate.
