Are you one of the many Americans with credit card debt? It can be stressful and financially challenging to confront your payments every month, especially if you know you can’t pay them in full or if they each have different due dates you need to stay on top of.
Yes, multiple credit card debts can be life-altering, but there may be a way to pay them down in a shorter amount of time and help save you some money. By consolidating your debt, you’d have one payment to worry about every month and you even may be able to pay it off faster.
However, before you decide to dive into debt consolidation, make sure it could work for you.
What is Debt Consolidation?
Consolidating your debt is the process of combining multiple debts into one new loan or credit card. You would have one new payment, and many borrowers try to take this opportunity to secure a lower interest rate if possible. You may even be able to pay off this debt faster or get a new repayment plan that’s more suited to your needs.
While it’s a great tool to help you pay down multiple debts at one time, you must be cautious and consider what got you into debt in the first place. Before you decide to consolidate your debt, you should try to pinpoint and address the financial habits that could put you into even more credit card debt.
How Can I Consolidate My Credit Card Debt?
There are multiple ways to consolidate your credit card debt, and the “right” option depends on your financial situation, needs and goals.
Credit Cards
If you’re able to consolidate your credit card debt with a new credit card that has a lower interest rate, you could save on interest in the long run. Additionally, some credit cards offer a 0% annual percentage rate (APR) for a fixed amount of time when you transfer your balances to them.
However, you’ll likely want to pay down as much of this debt as possible within this time period as the interest rate could increase significantly. Make sure you review the terms of the new credit card to understand how much you will be paying in interest after this introductory period and to determine if it could work for you.
Personal Loans
Since personal loans typically have a lower interest rate than credit cards, you may want to consider taking one out to pay off your higher-interest credit cards. By taking this route, you could pay less interest over time and possibly save some money.
Personal loans also generally have fixed payments so you’d know how much you owe each month and would be able to better budget for other bills or necessities.
Home Equity Loans
If you’re a homeowner and have equity built up in your home, you may be able to take advantage of a home equity loan or home equity line of credit (HELOC). These types of loans help tap into your home equity and either get you a lump sum of money at closing or a line of credit that you can access when you need to during the borrowing period. They also generally have lower interest rates than credit cards.
Keep in mind that to qualify for these types of loans, you’ll need enough equity in your home to access.
Debt Management Plan
Taking out a loan to pay off other loans may not work for you. If you’re hesitant about taking this route, you may want to consider creating a debt management plan with a credit counseling agency instead. With a debt management plan, you’d only be paying the agency, and it would make itself the payer on your accounts and pay off your debts on your behalf.
This strategy could work for those who have overwhelming credit card debt and don’t know where to start as you’d have someone to help take on this responsibility for you, give you a plan and to help simplify your debt. In addition, you would need to close your credit accounts and would be unable to apply for new credit, reducing any temptation to overspend.
Things to Keep in Mind
Will credit card debt consolidation work for you? Here are some items to consider or keep in mind before you decide to commit to this option.
Lower Interest Rate
In general, the higher your credit score, the lower your interest rate could be, depending on your lender and loan terms. Whether you get a personal loan or new credit card, you may want to double check your credit score to determine whether or not you can get a lower interest rate and if it’s still worth it to consolidate if you can’t.
There are Upfront Costs
Consolidating your debt typically comes with upfront costs and fees. You may need to pay a transfer fee with a new credit card or an origination fee with a new loan. Either way, you’ll want to determine the total amount of fees and if it’ll be worth it for the money you’d save.
Your Financial Habits Won’t Be Cured
Debt consolidation can help your current situation but if you don’t address the reason you’re in debt, you could end up with even bigger financial burdens. Creating a repayment plan, finding other ways to access necessities or resources and confronting your overspending issues could all help avoid even more debt.
Missed Payments Could Worsen Your Debt
Depending on which option you choose to consolidate your debt, there could be consequences for any missed payments. You could be hit with late fees and your credit score may be damaged on top of that. It’s important to confirm that the new bill from consolidating fits within your monthly budget and that you still have room for other necessities.
Your Credit Score May Take a Hit
Opening a new credit card or applying for a new loan may temporarily lower your credit score. However, as long as you make your payments on time and in full, your credit score may actually eventually rise.
Can You Consolidate Your Debt?
Credit card debt consolidation can be a great tool to help you pay down your outstanding financial responsibilities. Whether or not it will work for you is all dependent on how much you owe, what option you choose and if you’re able to address the reason why you’re in debt in the first place.
This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information on financial planning or investment advice, consult a registered investment advisor or financial planner.
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