- Credit card debt consolidation refers to the process of taking out a new loan to merge credit card payments into one payment.
- Through credit card consolidation, it may be possible to obtain a new loan with a lower interest rate.
- There are different options for consolidating credit card debt with unique pros and cons to consider.
- Read more stories from Personal Finance Insider.
If you’re juggling credit card payments, it can be hard to stay on track and move forward. With credit card consolidation, it is possible to simplify the repayment process and merge multiple payments into one, ideally with a better interest rate. To do this, you take out a new loan.
While credit card consolidation can be beneficial and reduce payments and the total amount of interest you owe, there are risks to consider. Below, we cover the top six ways to consolidate credit card debt and the pros and cons to consider.
How to consolidate credit card debt
Choosing to consolidate credit card debt is not a choice to be made lightly. Why? Because you’re basically fighting debt with another loan, which can be risky. Done right, it can help, but how you do it matters too.
“Before you consider any method of debt consolidation, you need to work on paying off your debt. The first step is to lock up all your credit cards and stop taking out loans. Getting out of debt is very difficult when you contract more at once,” says Jay Zigmont, Ph.D., CFP® professional and founder of Live, learn, plana registered investment adviser based in Mississippi.
Understanding the root cause of debt can help you make meaningful changes and effectively use the debt consolidation strategies below.
1. Consolidate your debts with a personal loan
Personal loans can be used for different things, but a common way to use them is to consolidate high-interest credit card debt. In general, personal loans tend to have more competitive interest rates. By using a personal loan, it is possible to pay off existing credit card debt and then pay off the personal loan with less interest.
“A personal loan could lower your interest rate and end up with just one bill to pay. Just make sure you don’t use a personal loan to pay off your credit cards just to top them up,” suggests Zigmont.
2. Transfer debt to a credit card with balance transfer
If your credit is strong, you may be able to take advantage of a balance transfer credit card as a credit card debt consolidation tool.
offer a 0% balance transfer introductory APR for a limited time, and you can use it to your advantage by transferring your balance from another credit card and saving on interest.
But just keep in mind that this option is only useful if you are able to repay all or most of the debt you are transferring during the introductory offer period. Otherwise, the card’s APR will return to normal and negate any savings you would otherwise enjoy.
Ultimately, you’re using a credit card to pay off credit card debt, which can be a slippery slope. So if your problem is overspending with your credit cards, you could again be building up a balance or getting into more debt.
“A lot of people play credit card roulette and move the balance from card to card,” Zigmont says. “Keep in mind that even though this is a 0% interest offer, there may be a balance transfer fee every time you move it. You don’t progress if you pay transfer fee, and the promotional interest offer disappears.
3. Tap into your home equity
The house values are to skyrocket right now, therefore, it might be tempting to dip into home equity to consolidate credit card debt.
According to Freddie Mac, “The equity in your home is the difference between the value of your home and the amount you owe on your mortgage.” It is possible to take out a home equity loan to pay off high interest credit card debt. This option may result in lower interest rates, but may also include
it could add up. While this can be an attractive option – leveraging an asset you already have to pay off debt – it comes with considerable risk.
“It’s a really bad idea to use your home to pay off debt. You’re putting your home (secured debt) at risk for credit cards (unsecured debt),” Zigmont says.
4. Take out a 401(k) loan
Retirement savings are likely to be one of your most important assets, outside of your home. So, if you’re struggling with credit card debt, you might consider borrowing against your 401(k) to consolidate credit card debt.
In an ideal world, retirement savings should not be affected. Although it is possible to use a 401(k) loan to your advantage, it comes with a high level of risk.
“I do not recommend 401(k) loans for two reasons. First, the individual disconnects the loan amount from a market investment that would likely yield a higher return in the long run than “paying themselves interest” “, Explain Stacy MastroliaCPA, MBA, Ph.D. and Associate Professor of Accounting at Bucknell University’s Freeman College of Management.
In addition to taking money out of the market, there can also be major consequences to consider.
“If you quit your job before the loan is paid off, the full amount is due fairly quickly. If the balance is not paid, the plan will deduct the loan from the distribution and the individual will be responsible for taxes and probably for 10% penalty on the amount of the loan,” she explains.
5. Cash out the automatic refinance
The value of cars has increased latelywhich may make it an asset you want to use to help pay off your credit card debt.
With an automatic cash refinance, you can get approved for a new loan that will cover what you owe and pay cash on your existing car equity, which can be used to pay off credit card debt.
It’s a way to leverage an asset you already own to minimize your debt. But if you don’t pay, you risk having your vehicle repossessed.
6. Sign up for a debt management plan
If your credit card debt seems impossible and you’re considering going bankrupt, you might want to consider a debt management plan first.
A credit counseling agency can offer a debt management plan and work on your behalf to negotiate terms with your creditor and make payments for your debt.
Here’s how it works: you make monthly payments to the credit counseling agency, and then those payments are then allocated to the debt on a set schedule. The process can take four years or more, but can be a way to navigate debt and get support – at a price.
“There are debt consolidation companies out there. They promise to negotiate your credit debt. What they actually do is take your money, charge you a fee, and then give it to credit card companies. credit,” Zigmont says. “If you’re more than 90 days late, you can negotiate with collectors or credit card companies on your own, however they can.”
The bottom line
Credit card consolidation can be a strategic move to pay off credit card debt and pay less interest over time. But to be successful, it’s important to review what got you into debt.
“Consolidation may allow you to have a lower interest rate, but your spending and debt behaviors have more impact for most people than the interest rate,” says Zigmont.
Before using any of these options, do your research. Check all associated fees, interest rates, repayment terms and understand how this will affect your monthly payments and total loan cost.