Is Credit Card Consolidation Right For You?

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Credit card consolidation means combining the balances of several credit cards with another credit card or loan. While this technique doesn’t make debt go away, many people use this to successfully lower their monthly payments or interest rates. Every situation is different however, and it can be all too easy to opt for lower payments in the short term that have you paying more in the long run. So carefully consider all of your options or talk with a financial advisor before consolidating your credit card debt. The best way to reduce your debt is to develop smart money managing habits.

Why Should You Consolidate Credit Card Debt?

If you find yourself forgetting payments each month, credit card consolidation is a great way to simplify your credit card debts. With only one payment every month, you are more likely to pay your bills on time. Plus, looking at the progress you’re making on your overall credit card debt in one place can be much more satisfying.

In addition to simplifying payments, credit card consolidation may have financial benefits. It’s possible to transfer your debts from higher interest rate cards to low or no interest rate cards. Keep in mind that credit cards that offer no interest or fees often only do this for a limited time, after which they may charge a higher interest rate. Make sure that you are able to pay off the rest of your credit card debt within the free period of a low interest card.

It’s also possible that moving your credit card balances onto another card will have a positive impact on your credit score. Opening a new credit card will increase your overall available credit and decrease your credit utilization.

4 Ways to Consolidate Credit Card Debt

1. Credit Card Consolidation Loans

You can take out a consolidation loan or personal loan from your bank or credit union and use those funds to pay off your credit card debt. There are two kinds of personal loans: an unsecured personal loan, or secured personal loan. With a secured personal loan the amount is borrowed against collateral, like a car or house. This typically means your interest rates may be lower. An unsecured loan can sometimes be more difficult to access with poor credit, and the interest rates may be higher. The rates of personal loans will vary greatly by your credit score, so do your research to make sure you’re getting the best deal.

Pros:

  • Fixed payments and interest rates
  • Longer terms available

Cons:

  • May have an origination fee
  • May require good credit

2. Balance Transfers

Another option mentioned previously is transferring your credit card balances to  another credit card. Ideally, this credit card would offer a lower interest rate and easier payments. Balance transfer credit cards may offer a low introductory rate that can be beneficial if you are able to pay off your debt before the interest rate goes up.

Pros:

  • May be able to avoid interest

Cons:

  • Possible balance transfer fee around three percent
  • Will most likely need an excellent credit score
  • Introductory periods only last 12 to 18 months

3. Borrow From Retirement

If you have money set aside in a retirement account like a 401K or an IRA, you may be able to withdraw funds to pay off your credit card debts. In addition to reducing your retirement savings, you will also have to pay back the loan in five years and remain at your current job. It’s important to note that if you were to quit or lose your job, the loan would become due in 60 days. Getting a loan from your retirement can be a risky move, so talk to a financial advisor before committing to one.

Pros:

  • No credit check required
  • Interest is repaid to your own account

Cons:

  • May be subject to early withdrawal penalties
  • Must be repaid within five years
  • Can only borrow up to half the original amount
  • Cannot change jobs

4. Home Equity Loans

Using a home equity loan or line of credit, you may be able to take cash out of the value of your home in order to consolidate your credit card debts. A home equity loan generally has a fixed interest rate, while a home equity line of credit (HELOC) has variable interest rates. These loans can be easier to get, but in the event that you cannot repay the loan, your house may be repossessed.

Pros:

  • Slightly more lenient credit requirements
  • Low interest rates

Cons:

  • Can put house at risk
  • Lengthy repayment terms

Things To Watch Out For

If you have a lower credit score and no assets to borrow against, you may be tempted to use a debt management company. It’s important to understand how these work and the negative impacts the techniques used by these companies can have on your credit score.

Debt management companies negotiate with your creditors on your behalf for a lower payment rate. This can involve stopping payments and sending your accounts into delinquency which can lower your credit score. In addition, this process can take years to complete, and there’s no guarantee of success.

If you do succeed, the amount that was forgiven may be taxed as income, leading to more expenses. If you do decide to use this strategy, do so only after you have tried every other technique and having done thorough research into reputable debt settlement companies.

Manage Your Debt

It may be that none of these credit card consolidation techniques are right for you. You can still make a plan to pay off your debt effectively. Stay on top of your payments by writing them down on your calendar or setting reminders on your phone. Pay off higher interest credit cards first, if possible in order to save more in the long run. Create a monthly budget that eliminates unnecessary expenses and you may find extra room to pay off your debts sooner.

Take time to assess your finances realistically, and ask yourself how you can avoid accruing more credit card debt in the future. If an unexpected medical bill or home repair had to be put on a credit card, you may need to start or increase your emergency savings. Managing your spending will ensure you avoid unnecessary debt and build a financially healthy life.

Sources: ConsumerFinance | Forbes | Debt.org

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