How to Consolidate Credit Card Debt
May 2, 2019
With credit card debt on the rise, you may be facing a pile of unpaid bills. To make matters worse, owning more than one credit card likely puts you at risk of being bombarded by multiple creditors trying to collect on your many accounts.
This form of debt can quickly become overwhelming, but there are steps you can take to reduce the stress of paying back all those bills. Debt consolidation may be helpful for those who prefer to make just one monthly payment towards their compiled debt rather than individual payments to each creditor.
How Does Debt Consolidation Work?
Debt consolidation works by bundling multiple credit card payments into one monthly payment. Essentially, it simplifies the repayment process by turning multiple payments into one.
Debt consolidation may change your interest rate, payback period and overall cost. It’s important to consider different methods of consolidation and their effects on your debt before choosing the one that is right for you.
4 Ways to Consolidate Credit Card Debt
There are several options for consolidating credit card debt. From free credit counseling services to using home equity, read on to find a consolidation strategy that suits your unique needs.
1. Get Help From Non-profit Credit Counseling
Non-profit debt consolidation companies can help you manage payments and may even help reduce interest and eliminate additional fees. Aside from debt consolidation, these companies also offer financial wellness resources like workbooks, budget sheets and debt calculators.
Unlike for-profit debt management and settlement services, non-profit companies typically offer guidance and counseling services at little to no charge. They have no underlying motives and should not attempt to fool you into any long-term programs or contracts in order to manage your debt.
If you think you need professional guidance in order to manage your debt, a non-profit debt consolidation company may be a good solution for you.
2. Use a 0% Balance Transfer Card
A balance transfer card moves debts from an old card to a new one. The benefit of this method of consolidation comes in the form of APR. This type of card typically offers an introductory period with 0 percent APR, allowing payments to be made interest-free for a certain amount of time. This gives you the chance to pay off multiple credit card debts without worrying about collecting interest.
Balance transfer cards should be treated like any other credit card. When considering this form of consolidation, remember to carefully examine terms and conditions before applying –– look for things like the length of the introductory period, the APR after the introductory period and any possible fees you may be charged.
While most balance transfer cards offer a low introductory APR, be sure to note the rates after the introductory period has ended, as they will likely increase. Additionally, some balance transfer cards include annual fees or penalty charges for late payments.
Before applying for a balance transfer card, you should consider the following:
- Balance transfer cards require good credit. Typically, only those with good credit are approved for balance transfer cards. If you have poor credit and apply for a balance transfer card, a hard inquiry may appear on your credit report, further damaging your score.
- Balance transfer cards may worsen your debt. If you use the funds from a balance transfer card for anything other than debt consolidation, you may increase your debt and owe more money in the long term.
If you’re committed to eliminating credit card debt and are sure you won’t need to use old credit during repayment, a balance transfer card may be a good option to pay back credit card debt or other outstanding balances while capitalizing on lower interest rates.
If you decide to use a balance transfer card to consolidate debt, compare the features of multiple cards before settling on the best balance transfer card for you.
3. Take Out a Personal Consolidation Loan
Debt consolidation loans work by providing the funds needed to pay off individual creditors quickly. Once each credit card debt has been repaid by the funds from the loan, only one monthly payment is needed to pay off the loan.
This is a simpler way to repay credit card debt than paying back multiple accounts at once and can be obtained through personal banks or debt relief companies.
Taking out a personal loan to consolidate credit card debt is a good choice for those prepared to quickly pay back high-interest credit card accounts without using additional credit.
You should note the costs of consolidation loans before asking to be considered for one:
- Interest rates: debt consolidation lenders may see you as a high-risk borrower and charge a high interest rate as a result.
- Credit card accounts: debt consolidation loans do not close the credit card accounts you are consolidating, meaning new debt may be accrued on top of the new loan.
- Repayment progress: though a consolidation loan streamlines monthly payments, it creates a new account that must also be paid back in full.
4. Take Out a Home Equity Loan
If you are prepared to pay off credit card debt quickly and avoid future debt, using home equity may be a good option for consolidating debt. This method of debt consolidation involves borrowing against the value of equity in a home.
Equity is the difference between your home’s appraisal value and the value of your mortgage. For example, a home valued at $300,000 with $150,000 in mortgage has $150,000 in equity. Depending on the lender, up to 85 percent of a home’s equity may be borrowed at one time and can be used as a debt consolidation strategy. In this case, you could receive a home equity loan up to $127,500 to pay off debt.
This method of consolidation offers several benefits that may make it more attractive than personal consolidation loans or balance transfer cards.
Benefits of using home equity
- The number of monthly payments
- A repayment term is set with a clear end date.
- Variable interest rates are lower.
- More money goes towards the principal rather than interest.
These benefits may make using home equity to consolidate debt look very attractive. But before tapping into your home’s equity, be sure to consider the potential risks.
Drawbacks of using home equity
- Home equity loans take more time and paperwork than personal loans.
- Using your home as collateral could result in default or even foreclosure.
- You will likely face closing and appraisal fees that can increase your loan amount.
- The 2018 tax reform does not allow deductions for interest paid on home equity loans.
- You need good to excellent credit to be considered for a home equity loan.
How to Consolidate Credit Card Debt With Bad Credit
To consolidate your credit card debt when you have bad credit, you can try several strategies. You may be able to get approval for a personal loan, but there are other alternatives that may be easier for those with poor credit health.
Poor credit can make it harder to find good debt consolidation options –– a FICO score below 580 often makes credit card consolidation difficult, but even those with “poor” credit (300–579) can be approved for personal loans. Additionally, you can seek out credit counseling services for professional guidance on navigating debt.
Apply for a Personal Loan
Even with bad credit, you should consider applying for a personal loan. Approval for the loan may make it easier to stay on top of payments and interest rates and spreading payments out over time makes debt more manageable, especially if your credit health is poor.
Some online lenders offer personal loans for those with poor credit scores and use other factors to determine whether you are a good candidate for their services. These companies, who often specialize in subprime loans, may look at employment history, income and education (rather than credit history) before approving you for a loan.
The drawback to personal loans for those with bad credit is a significantly higher interest rate. To account for risk, lenders may increase your interest rate and APR –– this could increase your overall debt if you miss a payment or continue using credit while repaying the loan. You should expect a higher rate on most personal loans if your credit is bad.
If your credit is poor and the bills are piling up, agreeing to a personal loan with a high interest rate may seem like your only option. However, there are other debt management strategies to help get your payments under control.
Consider a Debt Management Plan
A debt management plan can be used to help you closely monitor your monthly payments and stick to a strict repayment plan. Many credit counselors offer these plans and can help you find the repayment strategy that is right for you.
Hire a Credit Repair Service
If your credit report reflects inaccuracies or mistakes, credit repair services, like those offered through Lexington Law Firm may be able to help you recover from items that should not be affecting your report and score. Working with creditors and bureaus, Lexington Law’s priority is to make sure your report is a fair and true representation of you. Capitalizing on credit repair, while practicing responsible credit card usage, may be able to help you both pay down debt and improve your credit score simultaneously.
File for Bankruptcy
Filing for bankruptcy can put an end to collection calls and lawsuits, as well as erase your current debt. It may even improve your credit score. While bankruptcy can help you manage your debt, you should carefully weigh your options before making a decision on how to best consolidate and pay down your credit card debt.
Consider these elements when considering bankruptcy:
- Type of bankruptcy: Chapter 7 bankruptcy is often the least expensive and easiest way to find relief from debt, but Chapter 13 bankruptcy may make it more difficult for lenders to collect from you.
- Impact on credit: Both types of bankruptcy negatively impact credit scores –– Chapter 7 bankruptcy stays on a credit report for 10 years, while Chapter 13 bankruptcy lasts seven years.
- Debt discharge: Some debts cannot be erased by filing for bankruptcy, including child support, alimony and tax debt.
If you feel overwhelmed by multiple credit card payments and want to streamline your monthly expenses, debt consolidation may be a good option. There are several consolidation options to choose from, so before choosing a consolidation method, be sure to explore how your debt, credit score and overall financial health could be affected.
If you are unsure of which debt consolidation method is right for you, it can always be helpful to reach out to a financial advisor, or perhaps even someone who has gone through the process of consolidating their debt.
If your credit report has been wrongfully affected by inaccurate or unfair items, reach out to a credit consultant at Lexington Law who will be able to review a summary of your report with you for free, and provide you with possible options to start working toward correcting your credit report.