Dealing with interest-bearing balances on multiple credit cards can be stressful and may seem unmanageable. Whether you’re trying to work down debt on two cards or 20, consolidating the money you owe in one place can make it easier to pay off and possibly save you money on interest, too. Even with the benefits of debt consolidation, proceed carefully to make sure it’s the right choice for you.
Why should you consolidate multiple cards?
If you’re paying interest on multiple cards, transferring those balances to one card or loan can allow you to pay off the combined debt at a lower total cost.
For example, if card X has an interest rate of 9%, card Y a rate of 18% and card Z a rate of 15%, the average interest rate is 14%. If you consolidate those three balances into a personal loan with an interest rate lower than 14% and with the same number of payments, you will almost always save money.
Another huge benefit to consolidation is organizing your balances. Often, people lose track of debt because it is spread out, leading to growing interest and even damage to credit scores from late payments. Grouping all of your balances onto one card or loan won’t make the debt disappear, but it will be easier to manage.
If you’re looking to consolidate debt, you have several options.
Personal loans: These loans are often a straightforward way of taking on one debt that will cover what you owe on multiple cards at a lower interest rate.
HELOC: A home equity line of credit is essentially a line of credit from a bank that’s leveraged against the equity in your home. HELOCs are secured loans so if you default, your home could be used to settle the debt. In this sense, this option presents some risk, but it also often comes with a lower interest rate.
Balance transfer cards: Balance transfer credit cards allow cardholders to transfer existing card balances to an account that typically has a promotional 0% APR period. During this period, those paying high interest have more time to work down their principal balances while new interest is temporarily delayed. Many balance transfer cards require making at least the minimum payment to maintain the 0% APR period. Be sure to check your card’s terms and conditions.
For many, consolidation will save money and help wrangle debt. But there are many things to consider before taking this path.
Terms of the loan: Don’t be misled by rock-bottom interest rates spread out over longer periods. The only amount that really matters when comparing options is the total paid off at the loan’s completion.
Balance transfer fees: Usually equal to 3% to 5% of the balance being transferred, these charges can quickly add up to a hefty sum, especially when you’re transferring multiple balances. Moving larger balances can make this solution less ideal, or not even worth the hassle. But, you could always opt for a card that comes without a balance transfer fee.
If your balances are too large: If your combined balances exceed a balance transfer card’s credit (or transfer) limit, you may not be able to consolidate all of your cards. This doesn’t necessarily mean you shouldn’t use a balance transfer card, but it does mean you should be more strategic about how you do. In this case, it’s usually best to transfer higher interest balances first.
Making the decision
Choosing a method to consolidate debt really depends on your situation. If you don’t own a home, HELOCs won’t even be an option, and personal loans should be considered. For others, a balance transfer card will act as a seamless, hassle-free solution to ebb interest payments. It’s best to do your research and find the choice that will save you the most money with realistic monthly payments.
Remember, credit card consolidation is a temporary solution, and if you do it, you should still work to pay off your debt as soon as possible. Create a plan that focuses on working down your most expensive debts first, and you’ll be free from the shackles of debt in no time.
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