Debt Consolidation – 5 Need-to-Know Tips

Daniel Joelson

Daniel Joelson

Total Posts: 579

Published Date: December 25, 2021

Daniel Joelson has been in the consumer finance space since 1994, he has helped to develop underwriting manuals for the financial sector. With a vast amount of Knowledge in consumer finance, he has been writing articles for all types of loans. With his knowledge, he is able to help many people to answer different financial problems.

Debt Consolidation

Credit card debt consolidation options include a balance transfer credit cards and debt consolidation loans among other options.

What is credit card debt consolidation?

Credit card debt consolidation is a strategy that takes multiple credit card balances and combines them into one monthly payment. Ideally, the new debt has a lower annual percentage rate than the rates on your credit cards, reducing interest costs, making payments more manageable, or shortening the payoff period.

The best way to consolidate your credit card debt depends on how much debt you have, your credit score and history, whether you have home equity or investments in a 401(k) account, and your self-discipline. Consolidation works best when your ultimate goal is to pay off debt.

The five most effective ways to pay off credit card debt are:

  • Refinance with a balance transfer credit card
  • Consolidate with a personal loan
  • Tap home equity
  • Consider 401(k) savings
  • Start a debt management plan

1. Credit card refinance

Pros:

0% introductory APR period.

Cons:

It requires good to excellent credit to qualify.

It usually carries a balance transfer fee and may have an annual fee.

Higher APR kicks in after 12 to 18 months.

Also called credit card refinancing, this option transfers credit card debt to a balance transfer credit card that charges no interest for a promotional period, often 12 to 18 months. You’ll need good to excellent credit (690 or higher on the FICO scale) to qualify for most balance transfer cards.

2. Credit card debt consolidation loan

Pros:

A fixed interest rate and monthly payment mean your payments won’t change.

Low APRs for good to excellent credit.

Direct payment to creditors at online lenders.

Cons:

Harder to get a low rate with bad credit.

Online loans may carry an origination fee.

Credit unions require members to apply.

You can use an unsecured personal loan from a credit union, online lender or bank to consolidate credit card or other types of debt. The loan should give you a lower APR on your debt or help you pay it off faster.

3. Home equity loan or line of credit

Pros:

Lower interest rates than unsecured personal loans.

May not require good credit to qualify.

Long repayment period, which keeps payments lower.

Cons:

You need equity in your home to qualify and a home appraisal is required.

Secured with your home, which you can lose if you default.

If you’re a homeowner, you may be able to take out a loan or line of credit on the equity in your home and use it to pay off your credit cards or other debts.

4. 401(k) loan

Pros:

Lower interest rates than unsecured loans.

No impact on your credit score.

Cons:

It can reduce your retirement fund.

Heavy penalty and fees if you can’t repay.

If you lose or leave your job, the loan is due in 60 days.

If you have an employer-sponsored retirement account like a 401(k) plan, it’s not advisable to take a loan from it, since doing so can have a significant impact on your retirement. Consider it only after you’ve ruled out balance transfer cards and other types of loans.

5. Debt management plan

Pros: 

Fixed monthly payments.

May cut your interest rate by half.

Cons:

Startup fees and monthly fees are common.

It may take three to five years to repay your debt.

Debt management plans roll several debts into one monthly payment at a reduced interest rate. It works best for those struggling to pay off credit card debt, but who don’t qualify for other options because of a low credit score. Learn more at https://en.wikipedia.org/wiki/Debt_consolidation

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