7 Ways To Consolidate Credit Card Debt – Forbes Advisor
Credit cards are a great tool for earning a variety of credit card rewards like cash back or miles for travel. They provide a source of emergency funds for “rainy days” and can help lay the groundwork for building credit to make room for future purchases like a car or house. Sometimes life comes along and now you’re stuck with multiple credit cards with varying balances. Planning and executing a strategy to pay off those debts can be daunting, but it can be done.
Credit card debt consolidation is a strategy in which multiple credit card balances are combined into one balance. This makes it easier to follow up as there is only one monthly payment and a due date to consider. These consolidation strategies often come with a lower APR which will save you on the total interest paid and allow you to pay off the balance faster.
With several methods of consolidating and paying off these debts, the best method may differ from person to person. Today, we’re exploring common and unusual ways to consolidate your debt.
One of the most common ways to consolidate your credit card debt is to contact your local bank or credit union and request a debt consolidation loan. Application processes can often be completed over the phone or online. The great thing about these loans is that they often offer flexible terms (usually 12-60 months) and establish a constant monthly payment, which makes budgeting easier. As an added bonus, some financial institutions will make a payment directly to creditors, saving you the hassle.
Be aware that your interest rate is likely determined by the length of the loan and your credit score. Loans may also be subject to origination fees, which are in addition to the overall cost of the loan.
Often times, the four big parameters used in loans are income, credit rating, total assets and total debts. Some underwriters, like the online lender Upstart, add a few non-traditional parameters to their loan approval process. During the underwriting process, parameters such as level of education, current length of residence, and even employment history can lead to approval where a bank may not have. This is especially useful for new borrowers who may not have established a strong credit profile.
There are a few downsides, such as the potential for upfront costs and fewer loan terms to choose from. The rates are comparable for those with a good credit rating, but could be much higher if your credit rating is bad.
Debt Consolidation Programs
A debt consolidation program is usually a service where your credit card are combined into one payment. From there, you would typically make a one-time payment to the program which would then pass the payment on to your creditors. Do not confuse this with a debt consolidation loan, where a loan is given that pays off your existing debts. Your existing debts are still there, but are generally more manageable.
Ideally, your program’s monthly payment is lower per month compared to all of your payments individually. It also means that more of the payment goes to pay off your existing debts. Debt consolidation programs work with your creditors to help lower interest rates on debts and eliminate variable costs such as late fees, even if none are promised. Some debt consolidation programs may also require you to close some or all of the cards you are consolidating, so be sure to check to see if you are continuing down this path if your goal is to hold onto your cards.
The National Foundation for Credit Counseling is a great place to start as a not-for-profit option, although other options can be explored. Keep in mind that while the ultimate goal of all of these programs is to create a payment plan that’s right for you, some come with varying setup or monthly fees. This should be factored into your decision to choose who to go with.
0% APR Deals on Credit Cards
Many credit cards offer a 0% APR introductory offer at balance transfers for a limited time after opening the card. While they may still be subject to a balance transfer fee (typically 3% to 5% of the consolidated balance), they often offer 0% introductory periods between twelve and eighteen months so they don’t fall apart. worry about the balance accumulating additional interest.
the Citi® Diamond Preferred® Card, for example, is a great option for those considering going this route. It comes with a respectable 0% APR on balance transfers for 18 months with no annual fee. The regular APR of 14.74% – 24.74% (variable) applies after the introductory period. Citi charges a 3% balance transfer fee, but the 18 months with no additional interest is attractive. The drawbacks are capped at the allocated credit limit given by Citi and limited to only 18 months before the interest starts accruing. For some, spreading out over a longer period may be more beneficial.
Keep in mind that good to excellent credit is recommended if you plan to apply for a credit card with a 0% introductory period.
Second mortgage or HELOC
If your home has appreciated in value over time, or the balance has been paid off by a reasonable amount, using your home could be a way to consolidate your debt. Take out a second mortgage or use a Home equity line of credit (HELOC) effectively uses your home as collateral 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, reducing monthly payments and paying off the balance faster. There could be additional mortgage related expenses when going this route, so a direct request to your lender is essential.
Take a 401 (k) loan
We generally do not recommend taking money out of retirement savings in all but the most urgent cases. Ideally, a 401 (k) The loan would not be your first choice for debt consolidation – that said, it does offer some advantages.
Taking a loan against your employer sponsored 401 (k) is one way to get a lower rate than a personal loan, and generally this strategy can help your overall credit profile. Taking out a loan on your own 401 (k) doesn’t require a credit check, so it shouldn’t affect your credit score. During this time, the debts you pay off with the loan will improve your credit rating.
Just understand that leveraging your 401 (k) reduces your retirement fund and that high fees can be charged if you are unable to repay the loan. The payback time may also be accelerated if you lose or change jobs.
Peer-to-peer loans is another way to access funds for a consolidation loan. Peerform, an in-market lending platform, brings together those looking for loans and those willing to invest. The idea is to create a “win-win” situation. The loan to consolidate debts into one easy monthly payment and an investor looking for a regular and attractive return on investment.
Fairness in owned vehicles
If you have a vehicle that is chargeable or has a low balance compared to its worth, this could be a worthwhile route to take. Take a loan, use your vehicle as collateral, would allow you to obtain a loan to repay your other creditors. In this situation, you have the option of receiving an auto loan rate which is generally much lower than an unsecured personal loan.
The downside here would be a limitation of the loan capped at the value of the vehicle. In addition, when holding an auto loan, most lenders require car insurance coverage on the vehicle, which could increase monthly expenses if it normally carried PLPD. Having said that, it’s a great way to leverage an asset to get a lower loan rate.
At the end of the line
Credit cards and their associated rewards programs can be great for earning and saving for the next vacation or just putting a little extra back in your pocket. However, getting over your credit card debt can be exhausting and void all points, miles, and cash back rewards earned on them. Exploring the options for eliminating this debt quickly and within your means can help you gain financial freedom and allow you to effectively monetize your credit cards.