Credit Card Debt Consolidation Options

Credit Card Debt Consolidation Options

John Russo

September 3, 2018

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 find it difficult to keep track of your interest rates and stay up to date on your multiple payments. If you’re wondering how to get out of credit card debt, you may not even know where to begin—especially if you’re only making minimum payments each month. You may want to explore your options to consolidate credit card debt.

Credit card consolidation—making one payment to one company every month instead of worrying about multiple cards—could help simplify your payment schedule, reduce your interest rate, and get you out of debt faster. Basically, credit card debt consolidation involves rolling all of your existing high interest balances into a single account that has a lower interest rate.

Some of the most common credit card debt consolidation methods are explained below. The method of credit card consolidation you choose will depend on your current financial situation, how much you can afford to pay each month, and other factors.

1. Take out a credit card debt consolidation loan

One of the most well-known credit card consolidation methods is to take out a credit card debt consolidation loan, which is a type of personal loan that you use to consolidate credit card debt all at once. Then, you only have to make payments on a single loan each month, which simplifies your monthly expenses.

With rates ranging from 4 to 36% and terms from two to seven years, a credit card 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 quickly. While taking out a loan with a short payoff term is ideal if you want to consolidate credit card debt, the shorter the term on the loan, the higher your monthly payments could be.

Most lenders offer debt consolidation loans between $1,000 and $40,000. Be aware that, depending on your lender, you may be charged an origination fee of up to 5% of the loan’s value to pay for processing. Before agreeing to a loan for credit card consolidation, read your entire loan contract and understand all 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 your credit card debt consolidation needs.

Should you get a loan for credit card consolidation?

If you have debt on several credit cards and want to simplify your payment schedule, credit card consolidation using a loan could be right for you. It 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 currently paying. In order to qualify for a lower rate (crucial if you want to consolidate credit card debt), you need a good to excellent credit score, a manageable debt-to-income ratio, and a steady source of income.

Before you take out a credit card 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 three 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%. If you’re already struggling to make minimum payments, it may not be the best credit card debt consolidation option for you.

2. Credit card consolidation through a balance transfer card

Balance transfer cards are a credit card consolidation method you might consider as an alternative to a personal loan. These cards allow you to transfer, or consolidate credit card debt to a new card with a low promotional rate. 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.

While balance transfer cards offer credit card debt consolidation at a significantly lower interest rate for a short period, the rate goes back up after the promotion ends. Also, depending on the card, you may end up paying a transfer fee of 3 to 5%. This might not seem like a lot, but if you’re in $15,000 in debt, you could end up paying $450 to $750 just to transfer your balances.

Is a balance transfer card right for your credit card consolidation needs?

If you have enough money to pay off your debt in a very short amount of time, a balance transfer card could be the best credit card consolidation option for you. It’s also a good choice if you have a low debt amount, high interest rates, and the income to pay it off before the promotional period ends.

Make sure to do your research before choosing this particular credit card debt consolidation method. Widely available online credit card reviews should explain the promotional rate, how long the rate lasts, and how much you’ll pay in fees to transfer your balance and consolidate credit card debt onto one account.

3. Credit card consolidation through 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 for credit card debt consolidation. The two main ways to use your home equity for credit card consolidation are cash-out refinance and home equity line of credit.

Cash-out refinance for credit card debt consolidation

With a cash-out refinance (or “refi”), you refinance your mortgage and take out up to 85% of your home’s loan-to-value ratio, using it for credit card debt consolidation. Then you simply pay your mortgage like you normally would, except now your outstanding credit card balances are rolled into each payment. Since rates are typically lower on secured debt like a mortgage, you could potentially save money on interest when you consolidate credit card debt through a cash-out refi. You’ll have more time to pay off the debt, too, because mortgage lengths typically vary from five to 30 years.

Home equity line of credit (HELOC) for credit card debt consolidation

home equity line of credit (HELOC) is another type of loan that uses your home as collateral. Unlike a cash-out refi, a HELOC allows you to take out money over time instead of all at once. Typically, the draw period ranges from five to 10 years, after which you typically have 10 to 20 years to pay it off. Similar to cash-out refis, a HELOC enables you to take out anywhere between 85 and 90% of your home loan-to- value ratio to use for credit card consolidation, which could give you a much lower rate and more time to pay it off.

Should you use home equity for credit card debt consolidation?

If you have enough equity in your home, a HELOC or cash-out refi could be the right way for you to consolidate credit card debt. By transferring your unsecured credit card debt over to a secured loan, you could dramatically reduce what you pay in interest over time on that debt.

However, since you’re also 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. Make sure that you’re able to afford these payments over the entire payoff period, otherwise you could risk losing your home. Otherwise, you should consider another credit card consolidation method.

4. Using a debt management plan for credit card consolidation

If you’re dealing with multiple high-interest credit cards, a credit counseling agency may have the right credit card debt consolidation 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 DMPs for eligible clients.

To be eligible for a DMP, your debt must be 15 to 49% of your annual income and you’ll have to prove that you would be able to pay off the debt at a reduced interest rate. You make monthly deposits into an account that your credit counseling agency will use to pay your creditors. Depending on the agency, your creditors, and other factors, a DMP could be the right credit card consolidation method. Specifically, it could reduce your interest rates by 8 to 25% and help you get out of debt in about 60 months.

Is a debt management plan right for your credit card debt consolidation needs?

A debt management plan could help you reduce your interest rates, but only if you are eligible. You’ll pay a monthly fee on top of your monthly DMP deposits, which may not be as expensive as a credit card debt consolidation loan, but you may have to pay more than your current minimum payments. If you’re worried about paying off your debt because your interest rates are too high but could afford to pay more than your minimum monthly payments, a DMP may be the right credit card consolidation option you.

5. Reduce your credit card debt with help from a debt settlement company

Debt settlement, which is the solution that the Freedom Debt Relief program offers, could be the right alternative to credit card consolidation if you have more than $10,000 in debt. In this process, 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 or other approaches to credit card debt consolidation.

How the debt settlement process works

Similar to credit card debt consolidation loans and DMPs, through debt settlement, you make monthly deposits into a special purpose account that you own. Unlike credit cared debt consolidation, these funds will be used later to pay debts with your creditors after the company has negotiated with them to reduce how much you owe.

While you deposit money into your account, debt negotiators contact your creditors and negotiate with them to reduce the amount you owe. Once you sign off on the negotiated terms, the funds in your account are paid to the creditor according to the agreement, and the debt settlement company collects their fee. This process continues with each of your creditors until all of your credit card debt is resolved. This takes from 24 to 60 months, depending on your creditors, how much you owe, and other factors.

Is debt settlement a better option than credit card debt consolidation for you?

If you’re struggling with more than $10,000 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 fall behind on your monthly payments. Since these programs could get you out of debt for a less than you originally owe, you could end up saving more money and becoming debt-free faster than other methods.

However, since you stop making payments while building up the funds to settle your debt, your credit score may be negatively affected, and you may be at risk for collection calls and lawsuits.

Before you commit to any debt settlement or debt relief company, it’s important to compare your options and make sure that you find the right one for you.

Credit card consolidation: FAQs

If you’re considering different ways to consolidate credit card debt, you’ll probably have plenty of questions regarding best practices of each method. We’ve answered some of the most frequently asked questions about credit card debt consolidation below.

I’m trying to liquidate assets to help pay down my credit card debts. Should I consider tapping into my 401(k) plan as a means of credit card debt consolidation?

Tapping your employer-sponsored retirement account should be considered a last-resort option for credit card debt consolidation, as it can jeopardize your retirement savings and you could incur a tax penalty for early withdrawal. While you can take out a loan against your 401(k) account without incurring a penalty, it can be risky.

The advantages of credit card consolidation via a 401(k) loan include the fact that it won’t impact your credit score and they typically have low interest rates. These loans usually come due within five years but, if you lose your job, you will only have 60 days in which to pay back your balance. If you can’t repay on time, you’ll face a penalty fee of roughly 10%, plus regular taxes on your unpaid balance.

Should I be checking my credit periodically while I embark on a credit card consolidation plan?

Absolutely. It’s a good idea to check your credit report from time to time regardless of your financial situation, since there may be errors that need to be fixed or issues that need to be addressed. Specifically, it’s important to check your credit report after you consolidate credit card debt, just to make sure everything is up to date and being reported properly.

If you’ve completed the process of credit card consolidation, download your free annual credit report (as mandated by federal law), and check for the following:

  • Are balances you have paid off zeroed out on your report?

  • Does the report show that you have made your payments on time?

  • Have any paid collections accounts been closed (assuming the debt has been paid)?

  • Are your accounts reflecting current information?

Is this a good time to consolidate credit card debt?

Yes and no, depending on your specific situation and needs.

One on hand, interest rates are at historic lows due to the broader economic impact of the coronavirus pandemic. They were already low in 2019, but the U.S. Federal Reserve slashed the benchmark rate to 0% beginning in March, 2020. This translates to lower interest rates for other loans. The only catch is that lenders have tightened their lending requirements, so it may be hard to get a loan at a low rate if you don’t have good to excellent credit or a low debt-to-income ratio.

What else should I keep in mind while I pursue my credit card consolidation plan?

If you’re trying to consolidate credit card debt, the last thing you want to do is spend beyond your means or make mistakes that could sabotage your efforts. What this means from a practical perspective is that you should stop using your charge cards altogether (avoid the temptation to resume using them once they’re zeroed out), be careful when considering new financing, and make a household budget.

Get started on credit card consolidation or debt settlement

If you’re struggling to keep up with credit card payments and worried about how you’ll pay off your balances, credit debt consolidation may help. However, it’s not the only solution and may not necessarily be the right one for you. Freedom Debt Relief is here to help you determine the best path to financial freedom. Our Certified Debt Consultants can explain your options, including our debt relief program. You can find out if you qualify today.

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