AD – This is a collaborative post // Consolidating credit card debt is a useful strategy for gaining better control over your finances. However, there are a number of different ways to do so. And, choosing the right one for your situation is crucial to pulling it off successfully. With that in mind, let’s take a look at the best options for credit card debt consolidation.
The Benefits Of Consolidating Credit Card Debt
Foremost among the advantages that come with credit card debt consolidation is converting multiple monthly payments into one. Ideally, this one payment will be lower than the total amount of the remittances you were making each month before consolidating. You might also want to try a credit card interest calculator whilst you’re managing your finances, like this one: https://www.sofi.com/credit-card-interest-calculator/, to help you work out exactly what your total monthly payment will be, including the interest. Once you have worked this out, you can work out what your best options to consolidate your debt will be.
Depending upon the method you choose, you could also see a reduction in the amount of interest you pay each month. Under certain circumstances, you might also improve your credit utilization ratio, which will bring a commensurate bump in your credit score. All of these factors together will give you a leg up financially, reduce the stress you feel, and make your debt easier to pay off.
Credit Card Debt Consolidation Methods
The leading strategies include balance transfer credit card accounts, personal loans, home equity loans, and debt management. Each of these has pros and cons you’ll need to weigh when determining your best best options for credit card debt consolidation.
Let’s take a look at each one.
Balance Transfers
Most credit card issuers, to win new business, offer balance transfer promotions, in which you’re invited to roll all of your outstanding balances into one of their cards. The incentive for doing so usually takes the form of an exceptionally favorable interest rate — for a limited time period. This can be as low as zero percent interest on transferred balances for a period of up to 24 months.
The smart play here is to be sure you can pay the deal off in full before that window closes, otherwise, you’ll be looking at a very high interest rate. It’s also important to note interest applied to charges on that card will be very high — and imposed right away. There might also be a balance transfer fee of a percentage of the amount you move over.
Personal Loans
Secured only by your promise to pay, personal loans are useful for consolidating debt, but they can be a rather pricey way to get it done. With no collateral upon which to fall back, lenders will want a high credit score, a strong income and a higher rate of interest paid on the loan amount.
The primary benefit here is a longer repayment period than you’ll get with a balance transfer. You’ll also get a fixed interest rate and a fixed monthly payment, making budgeting around the payments easier.
Home Equity Loans
These can take the form of a cash-out refinance of your property or a home equity line of credit against it. The chief benefit here is an even lower interest rate than you’ll get on a personal loan, because this obligation is secured by an interest in your property.
In other words, they’ll take your house if you default.
This is why it’s key to be certain you’re in a position to meet the terms of this type of loan to the letter. It’s also why trading unsecured credit card debt for a secured mortgage is a dangerous move, one most financial experts caution against.
Debt Management
While often numbered among debt consolidation options, this is actually credit card payment consolidation. With that said, many of the benefits are the same. A credit counselor oversees the execution of the deal after negotiating a lower interest rate, fee reductions, and more favorable repayment terms with each of your creditors.
You’ll send money to the credit counselor each month, rather than your individual lenders, which is why this is more of a payment consolidation than a debt consolidation. As with each of the options above, you’ll encounter certain fees for the services provided. It’s key to note that you’ll also give over control of your finances to a third party with debt management.
Choosing Between Them
When all is said and done, your best option for credit card consolidation is the one that reduces your monthly payments as well as the amount of interest you’ll pay, along with the time required to pay off the debt.
Keep in mind that your credit history is a consideration too. The first three approaches require a good credit score to pull off. This isn’t as critical with debt management. However, you do need to be certain your income is steady enough to ensure you’ll hold up your end in every case.
Otherwise, you’ll dig an even deeper hole for yourself.
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Thanks for delivering such an exciting post!!
Ooh this was really interesting. A lot of this stuff I had no idea about (I live in a naive bubble, to be honest) so it was really interesting to hear about the different options available. Thanks!