For individuals burdened by high levels of high interest rate credit card debt, the seemingly endless cycle of making payments on multiple accounts each month can really take some of the enjoyment out of life. Fact is, when it becomes a struggle to pay the bills each month because credit card bills absorb too much disposable income, it’s no fun.
Worse still, when someone can only afford minimum monthly payments, too much of those minimum payments are eaten up by interest expense, with only a fraction of the payment being allocated to the balance owed. Here’s where debt relief comes in, whether it takes the form of debt consolidation, credit card debt refinancing, or a debt management plan.
Should you consolidate credit card debt? What is the best way to consolidate credit card debt? Consolidating your credit card debt can make the debt settlement process a lot easier to manage. Check out our tips for consolidating your credit card debt.
5 Ways to Consolidate Credit Card Debt
Debt consolidation combines multiple debts into one single loan, typically resulting in a lower interest rate and monthly payment. If you want to learn how to consolidate credit card debt, there are a number of different avenues to consider.
Five ways to consolidate credit card debt include taking out a debt consolidation loan (DCL), taking advantage of credit card refinancing through a promotional balance transfer offer, enrolling in a debt management plan through a non-profit credit counseling agency, taking out a low fixed interest rate home equity loan (a form of secured debt in which the equity in your home serves as collateral), or taking out a lower interest rate loan against 401-k savings.
Credit Card Debt Consolidation Loan
A credit card debt consolidation loan (DCL) provides the dual benefits of streamlining the repayment process while simultaneously lowering interest expense and the total amount repaid over time. In a credit card debt consolidation loan scenario, a debtor borrows sufficient funds through a personal installment loan that are immediately deployed to pay off a variety of different unsecured credit card debt accounts.
The DCL remains, but the repayment process gets simplified into one single monthly payment while saving money and improving monthly cash flow through a lower blended interest rate and lower monthly payment. This also helps avoid inadvertent delinquencies and late fees that harm a credit score and make the debt more expensive.
Credit Card Refinancing vs. Debt Consolidation
Let’s take a closer look at the difference between credit card refinancing vs. debt consolidation. The primary difference between credit card refinancing and debt consolidation is that credit card refinancing takes place through a promotional interest rate balance transfer, rather than through a debt consolidation loan.
A balance transfer credit card allows someone to refinance by transferring high interest rate credit card debt from an existing credit card account to another credit card account at a lower promotional rate for a specific period of time. In the best of circumstances, the promotional interest rate on the credit card balance transfer will be 0% for a period as long as twelve to twenty-four months.
These 0% balance transfer credit cards are highly coveted and generally reserved for people with strong FICO credit scores well into the 700s. However, it is not uncommon for individuals with good to very good FICO credit scores to still qualify for low interest rate promotional rate balance transfer offers.
However, it is important to be absolutely clear as to the length of the promotional interest rate period on a balance transfer credit card. Following the end of the promotional rate period, the interest rate on a balance transfer will climb substantially higher – often to as high as the interest rate for credit card purchases – which can be 15%-25%. So, which is better, credit card refinancing or a debt consolidation loan?
The answer comes down to timing. If you think you will be able to pay off the full balance (or close to it) before the promotional interest rate period expires, a balance transfer offer can be better than a debt consolidation loan. However, if your monthly cash flow dictates that it will take longer to pay off the balance – and that you could become subjected to a high interest rate when the promotional period expires – then credit card debt consolidation will be the better approach. You should also be clear about balance transfer fees, as most balance transfers will involve fees of 3%-5% of the amount of the transfer.
Should I Consolidate My Credit Card Debt?
Credit card debt consolidation takes time and self-discipline – but it can be worth the effort. It is important to consider whether you possess the self-discipline necessary to curb extra spending on restaurants, clothing, sporting events and other luxuries that simply need to be avoided until your credit card debt problem is resolved.
Taking out a DCL to consolidate credit card debt implies adding to the debt load – and so it is an absolute must that funds from a debt consolidation loan be entirely allocated toward paying off pre-existing debt balances. Debt consolidation loans, credit card balance transfers, and debt management plans are all good in that they provide a timeline and a pathway out of debt – but only if you behave responsibly.
A home equity loan can be helpful because of the lower interest rate, but it does convert a form of unsecured debt into secured debt, placing your home at risk if you default. However, if you’re looking to simplify the repayment process on a number of unsecured debts while saving money on interest expense over the long term, and have the self-discipline to allocate funds generated through a debt consolidation loan responsibly while continuing to curb spending behavior, then debt consolidation can work for you.
About the Author: Steven Brachman
Steven Brachman is the lead content provider for UnitedSettlement.com. A graduate of the University of Michigan with a B.A. in Economics, Steven spent several years as a registered representative in the securities industry before moving on to equity research and trading. He is also an experienced test-prep professional and admissions consultant to aspiring graduate business school students. In his spare time, Steven enjoys writing, reading, travel, music and fantasy sports.