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4 Ways to Consolidate Credit Card Debt
There are several ways of consolidating credit card debt to reduce monthly payments, and the best way to consolidate will depend on how much debt you have, your credit score, and other factors. The following are four ways to consolidate credit card debt along with their pros and cons:
1. Refinance With a Balance Transfer Credit Card
A balance transfer is a type of credit card transaction in which you move the money you owe from one credit card to another that charges a lower interest rate. When choosing a balance transfer credit card, you should consider several factors such as the transfer fees you have to pay, availability of purchase offers and the credit limit.
- Consolidates your credit card debt into a single, manageable payment.
- Many of the balance transfer cards come with interest-free periods, ranging from six to 18 months.
- Allows you to pay off high rate credit cards to low-interest ones, enabling you to save money and get out of debt faster.
- The 0% interest offer lasts for a limited time.
- Although some cards offer no-fee transfers, most cards charge between 3% and 5% of the transfer amount.
Note that refinancing with a balance transfer credit card is recommended only if you have good to excellent credit. That's the only way to qualify for the low-interest rate and the 0% interest offer.
2. Apply for a Personal Loan
A personal loan is a form of loan that you can use to achieve different financial goals, including covering personal expenses, making big purchases and consolidating debt. Personal loans can also be secured, meaning you need collateral to borrow money, or unsecured, with no collateral required.
- Helps you consolidate multiple credit card debts into a single, lower-cost monthly payment.
- Total interest paid is usually lower.
- Helps you build credit if you repay the loan promptly.
- Many personal loans offer flexible borrowing limits.
- Personal loans attract fees and penalties.
- Could lead to more debt.
- Lower interest rates are not guaranteed, especially if you have a poor credit score.
When applying for a personal loan, be sure to consider factors such as the interest rate, applicable fees, repayment terms, borrowing limits and collateral requirements.
Should you get a debt consolidation loan to consolidate credit card debt, or is there another way? Here are expert tips to help you decide.
3. Apply for a Home Equity Loan
A home equity loan is a type of loan secured by your home. This means that you borrow against your home's equity, which is the difference between the amount you owe on your mortgage and the current market value of your home. You can then use the home equity loan for nearly any purpose, including consolidating your credit card debts.
- It consolidates your credit card debt into one monthly payment, reducing your odds of missing a payment.
- Most home equity loans come with a lower interest rate as your home secures the loan.
- While credit card interest is not tax-deductible, interest paid on home equity loan products may be tax-deductible.
- Most home equity loans have longer repayment periods.
- If you default on your new home equity loan, you may face foreclosure.
- If your home's value plummets, you could end up owing more than it's worth.
- You may have to pay upfront fees, such as a new appraisal for your home.
A home equity loan may be ideal for you if you have significant equity available in your home, typically at least 15-20%.
4. Set Up a Debt Management Plan to Consolidate Credit Card Debt
If you're struggling to pay your credit card debt but don't qualify for other debt consolidation options due to low credit, setting up a debt management plan (DMP) might be a good idea. If you decide on this option, you'll make one monthly plan to a debt management agency, and it will pay your creditors on your behalf.
- You only need to make one monthly payment.
- You may be able to secure a lower interest rate.
- Doesn't require a high credit score to qualify.
- Startup fees and monthly fees apply.
- Not all credit card companies participate in debt management plans.
You're probably wondering, does consolidating credit cards lower your credit score with a DMP? The truth is that getting into this arrangement should not affect your credit score. Although, if you include a number of older credit card accounts on a DMP, your credit score may drop in the short term as the average age of your accounts drops.
Nevertheless, the negative impact a DMP could have on your credit report may be minimal compared to your long-term positive impact of paying off your credit card debt.
Get a Debt Consolidation Loan from PrimeWay Credit Union
Should you consolidate your credit card debt? If you're burdened by high-interest credit card debt, you can uncomplicate your life by consolidating that debt with PrimeWay Credit Union. We are a credit union in Houston, Texas, that's dedicated to helping people navigate life's financial challenges and opportunities, so they can enjoy the financial freedom they deserve.
Are you ready to achieve financial freedom with a debt consolidation loan but don't know where to start? Contact us today for more information.