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How to Consolidate Credit Card Debt the Right Way

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If your credit card debt is getting out of control or you’re having trouble making payments, you should consider consolidating your credit card debt. Depending on which route you take, you may be able to lock in a lower interest rate, which will help you pay off your debt sooner. Consolidating your debt will also make it easier to manage, especially if you have an outstanding balance on more than one card. You will only have to make one monthly payment instead of sending money to multiple creditors. There are several ways to consolidate your credit card debt but choosing the right option depends on how much money you have and the current outstanding balance. Some options could leave you with a higher interest and even more debt, so make sure you understand how these changes will affect your finances. Use this guide to learn how to consolidate your credit card debt the right way.

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Take Advantage of a Balance Transfer Offer

Balance transfer offers remain one of the most popular options for consolidating credit card debt. It gives you the chance to transfer your existing debt to another credit card. The main benefit of choosing this option is that some companies will offer a 0% APR, annual percentage rate, for 12 to 18 months. This means you won’t accrue any new interest for at least a year. If you are having trouble paying off the compounding interest, this gives you a chance to pay off the principal before more debt accrues.

Come up with a plan to pay off your debts by the end of the promotional period. After the initial 12 to 18 months, the full APR will kick in.

This is a great choice if you plan on making enough money to pay off your remaining debt in the near future. However, the full APR may be higher than what you’re used to, so it’s best to pay off as much as possible during the promotional period.

You will generally need a strong credit rating to qualify for a balance transfer credit card. If you don’t have a lot of credit, this option may be beyond your reach. Many credit unions provide balance transfer credit cards, but you will need to be a member to apply.

When consolidating your debt, the credit card company may also charge you a transfer fee of 3-5%. The card may also come with an annual fee, so be sure you go through the requirements before choosing this option.

Credit Card Consolidation Loan

This option involves taking out a personal loan from a local bank or credit union, which will then be used to pay off your credit card debts. Instead of dealing with multiple creditors, the bank will pay your creditors on your behalf using the proceeds from the loan. In many cases, the interest on the loan will be lower than what you were paying on your credit card debt, helping you pay it off much faster than you would otherwise.

Most credit card consolidation loans come with fixed interest rates and set monthly payments, so you don’t have to worry about these numbers fluctuating over time. You can stick to your budget and pay off the given amount over a set period of time, assuming your finances stay the same.

You will need a decent credit score to get approved for a credit card consolidation loan. The better your credit rating, the lower the interest rate. If you have poor or zero credit, you may be better off applying for such a loan at a credit union. They tend to be more accepting of applicants with poor or no credit at all. You can also apply for a loan using an online lender, some of which may be willing to issue you a loan without looking into your credit score, but these loans often come with high interest rates.

When issuing the loan, the lender may charge you an origination fee, which is usually between 1%-8% of the total amount, to cover the cost of underwriting the loan. This fee will be included in your APR.

Home Equity Loan

If you are a homeowner, you can use your property as collateral to secure what’s known as home equity loan, or home equity line of credit (HELOC), with low interest rates. You don’t need an excellent credit rating to qualify for a home equity loan, but your home must have value. The bank or credit union will appraise your home before issuing the loan. This can help you lock in a long-term loan with low interest rates if you are ineligible for a traditional loan. With low credit and a long repayment period, you can pay off your credit card debt over time while paying less in interest

However, this isn’t an option if you rent your home or your home doesn’t have a lot of equity. If you fall behind on your monthly payments, there’s also a chance you could lose your house if the bank or credit union decides to seize it as a form of repayment.

401(k) Loan

If you have an employer-sponsored retirement savings account, such as a 401(k), you can take out a loan on your account to help pay off your credit card debt, but this will take away from your retirement savings. In most cases, this option should only be considered as a last resort*.

Instead of waiting until you retire, you will essentially receive an advance on your 401(k) to pay off your debt sooner rather than later. Taking out such a loan won’t affect your credit rating, and these types of loans usually come with lower interest rates than unsecured loans.

In addition to reducing your retirement fund, defaulting on this kind of loan comes with serious consequences. If you can’t repay the loan by the due date, usually within five years, you will face a hefty tax penalty for taking money out of your 401(k) before retirement. If you lose your job, the loan is due in 60 days.

*Consult a financial advisor or tax professional to see if a 401(k) loan is suitable for your personal financial situation.

Debt Management Plan

You may also benefit from a debt management plan. This option consolidates your debts into a single repayment plan to help you stay on track. They typically come with fixed monthly payments with low interest rates. However, you need to have a regular job with a steady paycheck to qualify.

This tends to be a great option for those with bad to no credit. The bank or lender will work with you to help you pay off the outstanding balance on a schedule that works with your finances. However, if you are unable to pay off such a loan at the end of five years, filing for bankruptcy may be a better option.  

As you can see there are many different options for consolidating your credit card debt. Making the right decision all depends on your credit rating and how soon you can pay off the loan. If you are having trouble getting approved for a traditional consolidation loan or balance transfer credit card, you may have more luck at a local credit union with more flexible lending policies.

When consolidating your debt, it’s best to be aware of all your options. Some solutions may work better with your finances than others, depending on your ability to pay back the loan.

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