If your high credit card debt is stressing you out, you might be thinking about making a balance transfer or consolidating your debt.
Credit card consolidation means you take on one kind of debt with favorable terms in order to pay off several credit card debts. Consolidating your debt, no matter the method, lets you keep track of just one bill, one due date and one interest rate, rather than several. You may also find lower and/or fixed interest rates with consolidation, which can lower your overall payments.
Before you take the plunge into debt consolidation, here are some options to consider.
0% APR balance transfer credit card
Many credit cards offer limited-time 0% annual percentage rate (APR) promotional periods. If you are approved for a card that offers 0% interest on balance transfers, you can consolidate your high-interest debt by moving the balance of your other credit cards onto the new card. During the promotional period—which can be as much as 21 months—you won’t accumulate interest while you work to pay down the balance.
However, most credit cards that offer balance transfers will charge a percentage fee when you move a balance onto it, which can add up if you have several large balances to transfer. This option is best if you can pay off the balance of the new card before the 0% APR time period is over; otherwise, you’ll end up paying a higher rate on a very large combined balance.
Consolidating credit card debt using a personal loan is the best option only if it’s the cheapest and most effective for you; it doesn’t differ much from other options, except that there’s a definitive end point at which the debt is paid off. Personal loans can be obtained from banks, credit unions, payday lenders and others. Not-for-profit credit unions tend to offer the lowest rates of these options.
Rates may be higher at peer-to-peer lending groups such as LendingClub and Prosper, but qualifying may be easier. You can use unsecured loans you receive through these groups for consolidating your credit card debt to pay off automatically or manually each month. Like personal loans, they involve a debt payoff plan, typically taking three to five years. However, a peer-to-peer loan isn’t a good idea if its interest rate is higher than the one on your credit card.
If you’re a homeowner, you may have the option of using a home equity line of credit, or HELOC, to consolidate your credit card debt. This line of credit is taken out at a bank and typically represents up to 85% of your house’s assessed value. A HELOC is a type of revolving debt, but it is also a secured loan since you’re borrowing against your home equity. This means that if you default, you could lose your house. HELOCs may be tax-deductible and have low interest rates initially, but they tend to come with high fees, and the interest rate is usually variable—meaning your payments could change dramatically in the future.
Third-party debt consolidation
While you can find a third-party debt consolidation company to help you consolidate your debt using these methods, it’s easier and cheaper to do it yourself.
Remember, if you’re going to take on the task of consolidating your credit card debt, you should be committed to paying it down once and for all. Simply moving your debt around won’t erase it.
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