Ever feel like you’re stuck in a never-ending cycle of debt? If you’re one of the millions of Americans who carries multiple credit card balances month to month, you might. Having several credit cards can make it tougher to keep track of your interest rates, stay up to date on all your payments, and other important factors that could help you get out of credit card debt. To make things worse, having multiple cards could end up costing you more and taking you longer to get out of debt—especially if you’re only making minimum payments.
Wouldn’t it be great if you could just make one payment to one company every month instead of worrying about multiple cards? If you answered yes, credit card consolidation could be the answer to your debt problem. This debt payoff method could help simplify your monthly payment schedule, reduce your interest rate, and get you out of debt faster.
What exactly is credit card consolidation? Simply put, it’s a way to manage credit card debt by rolling all of your existing high interest credit card balances into a single account that has a lower interest rate. There are many ways to consolidate credit card debt, including debt consolidation loans, balance transfer cards, home refinance, debt management plans, and debt relief programs. Each method has its own pros and cons, and not all of them will work for your situation. That’s why it’s important to compare your credit card consolidation options and choose the best one for you.
While the process of credit card consolidation may seem simple, it may be difficult to decide on the credit card consolidation method that’s right for you. Since everybody’s situation is different, there’s no silver bullet when it comes to credit card consolidation.
Since everybody’s situation is different, there’s no silver bullet when it comes to credit card consolidation.
There are 5 major ways people typically consolidate credit card debt. The method you choose will depend on factors like your current financial situation, how much you can afford to pay each month, and more.
1. Take Out a Debt Consolidation Loan
One of the most well-known ways to consolidate credit card debt is through a debt consolidation loan. Debt consolidation loans are a type of personal loan that you use to pay off all of your credit cards. Then, you only have to pay the loan back each month. This simplifies your monthly expenses.
With rates ranging from 5%-36% and terms between 2-6 years, a debt consolidation loan could help you get out of debt faster and save on interest—but only if you can qualify for a low enough rate and pay it off debt quickly enough. The best way to get a low rate is by taking out a loan with a short term. However, the shorter the term on the loan, the higher your monthly payments could be. So if you can’t pay more than minimum payments each month, this option may not be right for you.
A consolidation loan could help you get out of debt faster and save on interest—but only if you can qualify for a low enough rate and pay it off debt quickly enough.
Most lenders offer debt consolidation loans between $1,000-$40,000. Be aware that, depending on your lender, you may be charged an origination fee of 0%-5% of the loan’s value to pay for processing. Before agreeing to a loan, read your entire loan contract and watch out for hidden fees your lender might charge. Most importantly, do your research to ensure that the lender you choose has the right rate, term, and service for you.
Should You Get a Debt Consolidation Loan?
If you have debt on several credit cards and want to simplify your payment schedule, a debt consolidation could be right for you. These loans could help you pay off your debt in less time and save on interest, but only if you qualify for a rate that’s lower than the average rate you’re paying on your credit card debt right now. In order to qualify for a lower rate, you need a good or excellent credit score, a manageable debt-to-income ratio, and a steady source of income, among other things.
Before you take out a debt consolidation loan, make sure you can afford your new monthly payment. For example, if you have $15,000 in credit card debt and get a debt consolidation loan with a rate of 12.5% APR and a term of 3 years, your monthly payment would be $836.34. This could be nearly double what you would pay if you had the same amount of debt with an average credit card interest rate of 16.99%. So if you’re already struggling to make minimum payments, it may be difficult to keep up with payments when you take out a debt consolidation loan.
2. Transfer Debt to a Balance Transfer Card
Balance transfer cards are a credit card consolidation method you might consider as an alternative to a debt consolidation loan. When you take out a balance transfer card, you transfer all of your current credit card debts onto a new card that has a low promotional rate for a limited amount of time. With rates as low as 0% for an average period of 16 months, you could avoid paying interest and focus on paying down your principal debt by transferring your credit card debt to a balance transfer card.
While balance transfer cards let you consolidate your debt at a significantly lower interest rate for a short period, the rate goes back up after the promotion ends. That’s why this method is best for people with enough money to pay off all of their debt very quickly.
Balance transfer cards let you consolidate your debt at a significantly lower interest rate for a short period, but the rate goes back up after the promotion ends.
Balance transfer cards might sounds like a great deal, but there is a downside: depending on the card, you may end up paying a transfer fee of 3%-5%. This might not seem like a lot, but if you’re in $15,000 in debt, you could end up paying $450-$750 just to transfer your balances.
Is a Balance Transfer Card Right for You?
If you have enough money to pay off your debt in a very short amount of time, a balance transfer card could be right for you. These cards are a great option if you have a low debt amount, high interest rates, and the income to pay off the credit card debt before the 0% promotional period is over.
Make sure to do your research before taking out a balance transfer card. There are credit card reviews online that should break down the promotional rate, how long the rate lasts, and how much you’ll pay in fees to transfer your balance. Educate yourself about all of these factors before choosing a card, and you may be on your way to consolidating credit card debt and paying it off for good.
3. Take Advantage of Your Home Equity
If your home’s value is higher than your current mortgage balance, you may be eligible to take additional money out of your home and use it to pay off debt. There are two main ways to use your home equity to consolidate credit card debt:
With a cash-out refi, you refinance your mortgage and take out up to 85% of your home’s loan-to-value ratio, using it to consolidate your credit card debt. Then you simply pay your mortgage like you normally would, with your outstanding credit card balances now rolled into the payment.
Since rates are typically lower on secured debt like a mortgage, you could potentially save a lot on interest by consolidating credit card debt with a cash-out refinance. You’ll have more time to pay off the debt, too, because mortgage lengths typically vary from 5-30 years. However consolidating your debt with a cash-out refi will add to the amount you have to pay each month and if you are unable to pay, you may risk losing your home.
Since rates are typically lower on secured debt like a mortgage, you could potentially save a lot on interest by consolidating credit card debt with a cash-out refinance.
Home Equity Line of Credit (HELOC)
A HELOC, or Home Equity Line of Credit, is another type of loan that uses your home as collateral. Unlike a cash-out refi, though, HELOCs allow you to take out money over time instead of all at once. Typically, the draw period on these loans range from 5-10 years. After this period ends, you typically have 10-20 years to pay off the loan.
Similar to cash-out refi’s, you can take out anywhere between 85%-90% of your home loan-to-value ratio with a HELOC. This could allow you to consolidate credit card debt at a much lower rate and give you more time to pay it off. However, just like a cash-out refi, a HELOC requires you to use your home as collateral, which could be risky if you can’t pay the debt.
Should You Use Your Home Equity to Consolidate Credit Card Debt?
If your home has enough equity, a HELOC or cash-out refi could be right for you. By transferring your unsecured credit card debt over to a secured loan, you could dramatically reduce your interest rates and have a longer time to pay off the debt.
Using your home equity to consolidate credit card debt does have its downsides, though. Since you’re adding to your mortgage, your monthly payments could go up. Plus, taking out a new mortgage resets the clock on your debt repayment, so you may be in debt for a longer time if you choose to consolidate credit card debt with a cash-out refi or HELOC. Make sure that you’re able to afford these payments over the entire payoff period, otherwise you could risk losing your home.
4. Sign Up for a Debt Management Plan
If you’re dealing with multiple high-interest credit cards, a credit counseling agency may have the right solution for you. It’s called a Debt Management Plan (DMP), and it could reduce your interest rates to a manageable level. Credit counseling agencies are typically nonprofit organizations that offer financial education services, budgeting help, and Debt Management Plans for eligible clients.
To be eligible for a DMP, your debt must be 15%-49% of your annual income. You also have to prove that you would be able to pay off the debt at a reduced interest rate. With this credit card consolidation method, you sign up for a Debt Management Plan, then make monthly deposits into an account that your credit counseling agency will use to pay your creditors.
Depending on your credit counseling agency, your creditors, and other factors, a Debt Management Plan could reduce your interest rates between 8%-25 and help you get out of debt in about 60 months.
Is a Debt Management Plan Right for You?
A Debt Management Plan could help you reduce your interest rates, but only if you are eligible. If your debt is over 49% of your income or you are unable to make your new monthly payments, you may not qualify for a DMP. If you are eligible, you will have to pay a small monthly fee on top of your monthly deposits to your DMP. While the fees and monthly deposits may not be as expensive as taking out a debt consolidation loan, you may have to pay slightly more than your current minimum payments.
If you’re struggling to pay off your debt because your interest rates are too high, and can afford to pay more than your minimum monthly payments, a DMP may be a good option for you.
5. Reduce Your Credit Card Debt with Help from a Debt Settlement Company
Debt settlement, also known as debt relief, debt resolution, and debt negotiation, is a process where you work with a company that negotiates directly with your creditors to get them to accept less than you owe on your debt. By reducing the principal owed, debt settlement could be a faster, more affordable debt solution than a DMP through credit counseling.
As one of the largest and most skilled debt negotiators in the industry, Freedom Debt Relief has resolved over $9 billion in credit card debt for our clients. Our proven program could help you settle your debts for less than you currently owe. Here’s how it works:
Call us for your free debt consultation. If you have endured a financial hardship and you’re struggling with at least $7,500 in credit card, personal loan, or medical debt as a result, you may qualify for debt relief. To see if you do, call us for a free debt consultation from one of our IADPA-Certified Debt Consultants. During this brief consultation, you can discuss your financial situation, review your debt consolidation options, and get help deciding if our program is right for you. If it is, your debt consultant will provide details about your monthly deposit, program length, fees, and other important information.
Enroll in our program. After signing up for our debt relief program, we set you up with a special purpose account where you will deposit your monthly program payments. The amount of your monthly program payments may be around the same or even less than you were paying each month for minimum payments on your credit card debt.
Your monthly program payments may be around the same or even less than you were paying each month for minimum payments on your credit card debt.
Similar to debt consolidation loans and Debt Management Plans, you make monthly deposits into this account. But these funds are not used to pay creditors right away. They will be used later, to settle debts with your creditors after Freedom Debt Relief has negotiated with them to reduce how much you owe.
While you are depositing money into your special purpose account, our expert debt negotiators are developing a custom negotiation plan based on your specific debts and creditors.
Let us negotiate with creditors on your behalf. We contact your creditors and negotiate with them to reduce the amount you owe, using over 15 years of negotiation experience to get you the best results. Before finalizing the agreement, we always contact you to sign off on the negotiated terms. Once you do, the funds in your special purpose account are paid to the creditor according to the agreement, and we collect our fee.
Settle your debts and be debt free! The negotiation process continues with each of your creditors until all of your credit card debt is resolved. Typically, our program takes anywhere from 24-60 months depending on your creditors, how much you owe, and other factors. Once your debts are resolved, you no longer owe your creditors and you are debt free!
Is Debt Settlement Right for You?
If you’re struggling with over $7,500 in credit card debt, a debt settlement program could be right for you—especially if you’re feeling overwhelmed by debt stress and starting to worry you might fall behind on your monthly payments. Since debt settlement programs could get you out of debt for a fraction of what you owe, you could end up saving more money and becoming debt-free faster than other credit card consolidation methods.
Debt settlement is designed to get you out of debt as quickly as possible, for as little as possible. But since you may fall behind on your payments while building up the funds to settle debt, your credit score may be negatively affected, and you may be at risk for collection calls and lawsuits. These consequences might sound serious, but the alternatives could be much worse. Continuing to make minimum payments could take years and cost thousands in interest alone. Bankruptcy could damage your credit score severely and stay on your credit report for up to 10 years.
It’s true that debt settlement could help you put your debt in the past, but only if you find a company with the right experience and expertise. With over 600,000 clients and over $9 billion in debt resolved since 2002, Freedom Debt Relief is the largest debt settlement company in the U.S. Our proven debt program could help you resolve your debt faster and for less, with a monthly program payment you can actually afford. But before you commit to any debt settlement company, it’s important to compare your options and make sure that you find the right one for you. Here’s how to tell if a debt settlement company is legit.
How to Choose the Right Credit Card Debt Consolidation Method for You
Every debt consolidation method has pros and cons, and there’s no one-size-fits-all solution. Here’s a quick review of each of your options to help you decide which solution is right for you.
|Consolidation Loan||•Consolidate credit card debt at a lower interest rate|
•Get out of debt in 2-6 years
|•Need good credit to qualify|
•Higher monthly payments
•Origination fees and other hidden fees
|Balance Transfer Card||•Consolidate credit card debt to a lower interest rate|
•Get 16 months+ to pay off the debt with rates as low as 0%
|•Limited time to pay off debt|
•Interest rates increase after promo period
•Balance transfer fees of 3%-5%
|Cash-Out Refi/HELOC||•Consolidate credit card debt into your home loan|
•Get a lower rate
•Extend your repayment period
|•Need equity in your home|
•Risk of foreclosure
•Resets the clock on your mortgage
|Debt Management Plan||•Reduced interest rates|
•More manageable monthly payments•
•Average of 60 month payoff period
|•Debt must be less than 49% of your income to qualify|
•Principal debt is not reduced
•Monthly fees required
|Debt Settlement||•Significant debt reduction|
•Affordable monthly payments
•Faster than minimum payments
|•Credit score may be impacted|
•Risk of legal action and collection calls
When it is said and done, how you choose to consolidate credit card debt depends on your situation. Your debt amount, how much you can afford to pay each month, and how soon you want to be debt free are all important factors to weigh in your decision making process. By taking time to read and learn about how to consolidate your credit card debt, you have already started on the right path.
If you need help deciding which credit card consolidation method is right for you, request a free debt consultation from one of our Certified Debt Consultants, or call 800-230-1553. During this brief, free call, our consultants will review all of your debt relief options, including the ones in this article, and help you choose the right one. Even if our debt settlement program isn’t your best option, you will be one step closer to debt freedom.