If you have multiple credit cards and are struggling to make the payments, you may want to consider credit card debt consolidation. Consolidation involves obtaining a personal loan or line of credit at a lower interest rate than your existing cards. You’ll benefit from a lower and often fixed monthly payment, which will make it easier to pay off your high-interest credit card debt for good. Various options are available, and the best one for you depends on the specifics of your financial situation. Here’s what you need to know about the possible debt consolidation paths for credit card debt.
This type of consolidation plan is offered through a non-profit credit counseling organization, which helps individuals strategize to pay off their debt. You should only enter a debt consolidation plan with a firm that is accredited by the National Foundation for Credit Counseling (NFCC). In most cases, you’ll make a monthly payment to the credit counseling organization, which will then distribute the funds to pay your credit card bills. The agency may also negotiate with your creditors for a lower interest rate or to waive late penalties and fees you have accrued.
The organization may require that you close your credit card accounts as a condition of entering the plan. Although doing so is not inherently bad as it keeps you from running up more debt, closing cards that you’ve had for some time can lower your credit score by shortening the age of your credit accounts. You should also compare plans offered by several different agencies, since start-up fees, monthly fees, and other costs vary dramatically from firm to firm.
If you are struggling to pay your credit card debt but still have a good credit score, consider applying for a personal loan from your credit union or bank. Ideally, you can qualify for a loan with a lower interest rate than the rates on your credit cards. This strategy will lower your monthly payment and allow you to pay off the cards immediately. You’ll pay less in interest over the life of the loan and have the convenience of one fixed payment rather than payments to multiple creditors.
When applying for a personal loan, make sure you understand the associated costs and fees. For example, some banks charge an origination fee that is a percentage of the loan balance.
If you have high credit card balances and interest rates but have preserved a good credit score, you can apply for a new credit card with a 0% interest rate for balance transfers. Then, transfer the high-interest balances on your other cards to the new card. Be aware that the 0% rate is only good for a limited introductory period, so it’s best to pay off the balance during that time frame.
If you miss a payment, you could lose the introductory rate. You’ll also have to qualify for a card that can accommodate the rest of your credit card debt. For example, if you have $5,000 on one high-interest card and $3,000 on another, your 0% card must have a limit of at least $8,000 to make this a viable solution. This figure must also account for any balance transfer fees, which are often 3% to 5% of the total transferred balance.
Taking a loan from an eligible 401(k) or IRA is another option for those facing high-interest credit card debt. For one thing, you don’t need a credit check to borrow from your retirement account. In most cases, you can borrow up to 50% of our account balance. Depending on the guidelines of your specific plan, you may be able to avoid early withdrawal penalties. Not only do these loans have low interest rates, but you’re repaying the interest to your retirement account since you’re technically borrowing from yourself.
However, borrowing money from your accounts reduces the amount of money you’ll have available in retirement. In addition, you’ll face fees and penalties if you are unable to pay back the loan within five years. And if you lose your job and are no longer contributing to the retirement account, the loan balance will be due immediately.
If you own a home and have some equity, you may be able to borrow against this amount to pay your credit card debts. A home equity loan or line of credit typically has a lower interest rate than most credit cards. In some cases, you may be able to deduct all or part of the interest you pay on this type of loan from your tax return.
However, borrowing against your home is risky. You could lose the property to foreclosure if you are unable to pay back the loan. Also, those with poor credit are unlikely to qualify for a home equity loan. If you do qualify, you will be responsible for closing costs, which range from 5 to 10% of the total loan amount. Some home equity loans have a variable interest rate rather than a fixed rate, which means that your payment will go up if interest rates go up.
A close friend or family member may be willing to loan you the money to pay off your credit cards in exchange for an interest rate above what they are currently getting at the back. Proceed with caution, however; if you are unable to pay back the loan, you could damage an important relationship. Treat the loan like you would any other by carefully recording payments and interest and paying on time as agreed.
With so many debt consolidation options, it can be difficult to know where to start. Get in touch with Solvable today to learn more about vetted companies that can help you find solutions for your financial struggles. The counselors will examine your situation and make recommendations that will help you take the next step to freedom from credit card debt.