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How to Consolidate Credit Cards

If your wallet is stuffed with multiple credit cards staying on top of your accounts is probably a hassle you could do without. Keeping track of balances and due dates takes some elbow grease, and then there’s the not-fun monthly ritual of figuring out how much you can afford to pay on each card. The good news is that if you are currently juggling a few cards with balances, you may be able to streamline your credit by consolidating your credit cards.

Common ways to consolidate credit card debt include moving all your credit card debt onto one card, or taking out a loan to pay off the balances. In addition to reducing stress, when you consolidate, you may be able to score a lower interest rate. That can make it easier to pay off the debt faster, which is one important factor that can help improve your credit scores.

Credit Card Consolidation Option #1: A Balance Transfer

With a balance transfer, you move your existing credit card debts onto a new card. Depending on your credit score, you may be able to qualify for a balance transfer card that doesn’t charge any interest for an introductory period that can be up to a year or more. Yep—zero interest. The average credit card interest rate these days is nearly 13%. Having a year or more where you’re charged little to no interest gives you the opportunity to use every available dollar to pay down the balance.

If you can push yourself to get the balance paid off during the introductory rate period, a balance transfer can be a solid credit card consolidation option to consider. If you anticipate paying down the debt after the intro period, be sure to check what the interest rate adjusts to after the intro period.

TIP: Cancelling credit cards you no longer use can actually hurt your credit score. If you use a balance transfer, it likely makes sense to keep the old cards you are no longer using. (You can learn more about how your credit card utilization rate can impact your credit score.)

Balance Transfer Nitty Gritty:

  • You typically need high credit scores to qualify for the best balance transfer deals. (Check your FICO® Score—the measurement more lenders use when evaluating your application for balance transfers and loans.)
  • There may be a fee to make a transfer. Typical balance transfer fees range from 1 – 4%.
  • The low interest rate only applies to the money that you transfer. New balances you run up on the card will be assessed a different (higher) interest rate.
  • Missing a payment due date can cause you to lose the low introductory rate and be charged a higher interest rate.

Credit Card Consolidation Option #2: A Personal Loan

Banks, credit unions and online lenders offer personal loans you can use to pay off your credit card debt. Once you’ve wiped out your card debt, you only need to focus on getting the personal loan paid off.

A personal loan may also help improve your credit score. One of the major factors in determining your FICO® Score is your utilization ratio: the combined balances on all your credit cards as a percentage of the overall credit limits on the cards. The lower your utilization rate, the better. Moving card balances to a personal loan might lower your utilization ratio.

The interest rate on a personal loan depends on a variety of factors including your credit score. It often can be a lower rate than what you are charged on your credit card balance. The average personal loan interest rate recently was around 10%.

A personal loan is for a set period of time; three to five years is common. It’s important to understand that your monthly payments will be a fixed amount. That’s a bit different than a credit card balance, where you can vary your payments month-to-month as long as you hit the minimum amount due. And a credit card does not have a fixed payback period.

Personal Loan Nitty Gritty:

  • Your credit scores will be a key part of determining if you qualify for a personal loan, and what interest rate you may be offered. Check your credit report beforehand so you can see what a lender is going to see.
  • Generally, lenders want your total monthly debt payments—credit cards, student loans, mortgage and car loans—to not exceed 43% of your total pre-tax monthly income.
  • Personal loans typically charge an upfront fee. The origination fee might be 1-5%.
  • Personal loans are for fixed lump-sum amounts. You can typically borrow $5,000 to up to $35,000. Some lenders may offer larger loan amounts.

Credit Card Consolidation Option #3: Borrow from Other Assets

If you have retirement savings in a workplace retirement plan such as a 401(k), or you own a home and your mortgage is less than 80% of the appraised market value of your home, you could likely borrow from either asset to pay off your credit card debt.

Borrowing from Your 401(K)

Most employer-provided retirement plans permit participants to borrow from their own savings. Since it’s your money, there’s no credit check or qualifying hoops to jump through. You can generally borrow up to half of your vested retirement balance, up to $50,000. The interest rate may be one or two percentage points higher than the Prime Rate, which recently was around 4%. You usually have up to five years to pay back money used for consolidating credit card debt. Miss that deadline and you may owe income tax and potentially a 10% fee on the remaining balance.

When weighing whether borrowing from your workplace retirement plan makes sense, keep in mind that if you leave your job–voluntarily or not–you typically must repay a loan within 60 days. If you don’t get it paid off in time, the loan morphs into a withdrawal, and that can end up costing you plenty. If you are under 55 you will owe a 10% early withdrawal penalty, and a withdrawal from a traditional 401(k) account will also be taxed at your ordinary income tax rate.

Another consideration is whether you want to touch your savings that will support you in the future, to pay for a cost today.

Borrowing from Your Home Equity

If you have at least 20% or so equity in your home you may be able to take out a Home Equity Line of Credit (HELOC) or a Home Equity Loan (HEL) and use the money to pay off or pay down your credit card debt.

A HELOC typically charges a variable interest rate tied to a benchmark such as Prime Lending Rate. You only owe interest when you tap (use) your credit line. A HELOC often has a 10-year “draw” period when you can borrow against it, before you must start repayment. A HEL is typically a fixed-rate loan with a set payback period of five to 10 years or so.

One important consideration to weigh is whether you are comfortable using your home as collateral to pay off your credit card debt. If you fall behind on your HEL or HELOC payments you could be forced to sell the home to pay back the loan.

Credit Card Consolidation Option #4: A Debt Management Plan

If you are unable to qualify for a balance transfer deal or personal loan that makes financial sense, and you prefer to not touch any of your assets, you may want to set up a chat with a reputable credit counseling firm to see if you are a good candidate for a Debt Management Plan (DMP). A DMP can make it easier for you to pay your credit card bills, but it will likely have a negative impact on your credit score.

Consolidating credit card debt can save you time and potentially save you money as well. Now that you know your credit card consolidation options, you can investigate which option may be best for you.

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