The average American owes $6,300 in credit card debt. And if you’re like 60% of Americans, you can’t pay off your balance and lose hundreds of dollars due to interest payments. Credit cards tend to have such high-interest rates that it can seem impossible to break the cycle.
But it can be done. When you’re bogged down by credit card debt, there are several methods to take control of your financial situation. The most popular way is to consolidate credit card debt.
You’ve heard of credit card consolidation before, although you might not know how to do it. Do you even know why you should consolidate? This guide will show you the how and why of credit card consolidation.
Why Should I Consolidate Credit Card Debt?
Debt consolidation can lower your interest rate and make debt repayment easier. Depending on the method of consolidation, it also provides a clear end date to your current date. So how does it work?
You join your various debt payments into one payment package. Typically, this should only be done when you can lower the interest rate on your current debt collection. Depending on your credit score, you can lower your interest rate and save you money.
It’s a better alternative than kicking the can down the road.
How to Consolidate Credit Card Debt
Now you know why debt consolidation can be a lifesaver. The hard part is deciding the best way to consolidate credit card debt.
And there are more options than you might think. Demolish your debt with these five debt consolidation strategies.
1. Personal Loan
Debt consolidation is just one of many great reasons to utilize a personal loan. It might seem counterintuitive at first. The secret is you use the loan to pay off your current outstanding debts.
When you pay off your credit card debts with a personal loan, you only have to make a single payment every month. Since credit cards tend to have some of the highest interest rates, there’s a good chance a personal loan will have a lower rate.
The best thing about a personal loan is it has a set end date. So long as you do not accrue any additional debt, you will be debt free once you pay off the loan. Keep in mind that some lenders charge origination fees.
2. Balance Transfer Card
Balance transfer cards exist to consolidate credit card debt. These credit cards offer a limited time 0% interest rate when you transfer a balance. When you transfer your existing debt to the card, you won’t have to pay interest until the introductory period ends.
This period tends to last anywhere from half a year to two years. This means that you could pay off your debt within the timeframe and avoid interest payments entirely. Sounds too good to be true, right? Well, there is a downside.
Although balance transfer cards are a great option, they are only available for those with excellent credit scores. They also tend to carry a fee when you transfer a balance.
3. Home Equity Loan
Need something more than a personal loan? A home equity loan is available.
With a home equity loan, your house becomes collateral for the fixed loan payment. Like any secured loan, this means the collateral could be repossessed in the event that you default. It’s an intimidating proposition if you suddenly are no longer able to make the monthly payment.
So why go for a home equity loan instead? Home equity loans tend to offer even lower interest rates than personal loans. With the right rate, you can save even more money when you consolidate your credit card loans.
But there’s more risk to this reward. In addition to possibly losing your home, home equity loans come with more fees than a standard loan.
4. Debt Management Plan
There’s no denying that taking out a loan can be worrisome. Even without a loan, you still have options. A credit counseling organization might be right for you.
These organizations do not consolidate your debt. They do, however, create a plan that merges multiple debt payments into one. For those that struggle with payment deadlines, they’re a great option.
These organizations have many talented financial experts. They are sometimes able to coerce your bank into lowering your interest or reducing your monthly payments.
Unfortunately, there is a monthly fee associated with most of these credit counseling organizations.
5. 401(k) Loan
In a dire financial situation, you could turn to your retirement account. Some 401(k) accounts allow for 401(k) loans. With this type of loan, you can pay off your existing debts by borrowing from your retirement account.
This should be done as a last option. The repayment plan automatically deducts money from your paycheck. You are limited to withdrawing only half of your balance, and it must be paid back within five years.
The worst part is you’ll have to pay back the loan within two months if you lose your job. You’d better hope you like where you work because you shouldn’t move until you can pay back the loan.
Crush Debt with Credit Card Consolidation
Many people struggle with debt because they don’t know how to manage it effectively. With a few simple steps, you can lower your interest and set a clear debt deadline. There are so many consolidation strategies; one of them is perfect for you.
Take control of your future and consolidate credit card debt. With just a few phone calls, you’ll set yourself on a clear road to better financial health.