If you are feeling overwhelmed by the burden of debt from multiple credit cards or are having difficulty keeping track of numerous payments, debt consolidation might be the right way to go.
When you consolidate credit card debt, you roll the balances from several accounts into one loan so that you only have to make one monthly payment—ideally, at an interest rate that saves you money overall. The result should make paying off your debt easier.
There are three main ways to consolidate your credit card debt, and each comes with its own issues and pros and cons you should consider. Read on to find out which option is best for you.
Before you choose one of the options below, be sure to check your credit reports and scores first. If there are any inaccuracies or errors, they could disqualify you from certain types of offers, so you'll want to make sure everything is in good shape before you apply.
As you're evaluating them, confirm that they will actually save you money once you factor in any transfer or origination fees. And once you do choose a plan, commit to making payments on time each month. Not doing so could get you in more hot water than before.
1. Apply for a Balance Transfer Credit Card
Some cards even offer 0% or very low balance-transfer rates for a period of time, ranging from six to 18 months. (You'll typically need good to excellent credit—think scores of 670 and above.) If you pay off your debt during that time, you don't pay any interest. After the 0% introductory period, the rate resets at a higher level.
With a balance transfer to another credit card, you are almost always going to pay a balance-transfer fee. Typically, it's around 3% to 5%, though sometimes you can find a no-fee transfer. You should always calculate the amount of the balance transfer fee and make sure that your new interest rate still saves you money despite paying that fee.
2. Take Out a Personal Loan
You may also consider taking out a personal loan from a bank, credit union or online lender, which will typically offer a fixed interest rate for a period of three to five years. The rates available to you will depend on your credit scores.
Start by visiting a credit union—they almost always offer the lowest rates (and federal credit unions can't charge more than 18%). But personal loan rates can top out at 36%, so be sure to shop around.
You may have to pay an origination fee for the loan, so be sure to ask about all the terms. And if a lender is offering a personal loan without checking your credit history or credit scores, that's a big red flag.
3. Set a Debt Management Plan
If you're having trouble finding a balance-transfer credit card or a personal loan at an advantageous rate, you might want to get in touch with a nonprofit credit counseling agency that can help you set up a debt management plan.
The agency pays your creditors on your behalf and can sometimes even negotiate lower interest rates, debt forgiveness or lower monthly payments for you. In turn, you make one payment to the credit agency for all your debts.
You may also have to pay a small service or monthly fee. Some agencies may also require you to actually close the credit accounts that you are consolidating, which could hurt your credit scores. Be sure to ask for all the terms.
To find a reputable credit counseling agency, make sure it is accredited by the National Foundation for Credit Counseling.
4. Consider a Secured Loan
If you own a home, you may be able to borrow against your home with a home equity loan or a home equity line of credit (HELOC). A home equity loan comes as a lump sum with a fixed interest rate, while a HELOC works more like a credit card with a variable interest rate and certain credit limit.
This is considered a secured loan because your home is used as collateral. The interest rate may be lower than what you'd find on a personal loan or balance-transfer card. However, if you can't make your payments on time, you risk losing your home.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer, or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.