Credit card debt consolidation involves combining your existing credit card debts into a single loan, ideally one with lower interest and easier repayment terms. Because there are several different methods of consolidating credit card debt, learning how to consolidate credit card debt will help you figure out which type of consolidation is right for you.
Debt Consolidation Loans
Debt consolidation companies, banks, and credit unions offer consolidation. These can either be secured, in which you guarantee the loan by putting up valuable assets like your home as collateral, or unsecured, for which you need a very good credit score.
The primary advantage of a consolidation loan is the interest rates are usually significantly lower than those of credit cards. Because loan consolidation calls for you to take out a loan to cover multiple individual high-interest dates, you will have only one payment to make each month, and for the same amount each time. This is compared to paying several debts each month of varying amounts. So, the bill-paying process is streamlined.
Balance Transfer Cards
Many credit card companies offer balance transfer cards that allow you to transfer credit card debt from other cards onto one balance transfer card. Doing so can sometimes get you a lower interest rate. The biggest advantage, though, is that many of these cards have special low introductory interest rates, and if you can pay down your debt relatively quickly, you can save a lot of money. Just be careful to only transfer an amount you know you can pay off during the introductory period.
Cash-Out Refinance Mortgages
Some debt consolidation companies, banks, and credit unions can help you consolidate your credit card debt with a special kind of mortgage. If you own your own home, you can get a cash-out to refinance your mortgage to pay off your existing mortgage and your credit card debt. The advantage of this method is that it can allow you to consolidate your debt even if your credit isn’t the best. It can also lower your interest rate. The biggest disadvantage is the fact that you are putting your home up as collateral. If you default on the mortgage, you could end up losing your home.
Your employer might allow you to take out a loan against a portion of your 401(k). You can use this loan to effectively consolidate your credit card debt by paying off your cards and then repaying your retirement fund.
The big advantage of this approach is the fact that you do not need to qualify for a bank loan. The disadvantages are paying a large price for the withdrawal and the fact that the loan might come due all at once if you lose your job. Also, there is no guarantee that your employer will allow you to dip into your retirement.
Choosing The Right Credit Card Debt Consolidation Option For You
Learning how to consolidate credit card debt involves carefully considering your financial situation and the pros and cons of the various consolidation options. Fortunately, there is a wide range of options, so you are likely to find something that can work for you. Do your homework, assess your financial situation, and arrive at the best solution.