If you are having trouble with multiple credit card debts, debt consolidation might be the right option to address your current situation. This will help you pay off your debts a little bit easier. However, before you opt to use debt consolidation, it is vital to know how it works.
How Debt Consolidation Works
Debt consolidation is done by taking out a new loan or credit card to help pay off your multiple existing debts. The term “consolidate” suggests merging many credit card accounts into one. However, it is also possible to consolidate a balance from one credit card.
Consolidating your debt is excellent when you can qualify for a new loan or credit card with a lower interest rate than your current debt. That way, you can save more money and pay your debts even faster.
If you have multiple debt accounts that need consolidation, it can be done by giving you one monthly repayment schedule. Having a set monthly schedule can help you keep track of all your payments for the multiple debt accounts. Furthermore, if you currently have credit cards that do not have any set repayment schedule, a personal loan’s set schedule can help you with that.
4 Ways To Consolidate Credit Card Debts
Lucky for you, there are various ways to consolidate credit card debts. You can check them out below and find out what suits you best:
Apply For A Personal Loan
Several lenders, such as banks, credit unions, and online lenders, offer personal loans for debt consolidation. The good thing about this type of loan is that they can develop a fixed interest rate, a set repayment schedule, and a set repayment term. Moreover, the loan term usually takes three to five years, depending on the loan.
Personal loan rates can vary significantly and this will mostly depend on the lender and your current credit status. Hence, it is essential to shop around to widen your options.
Use a Balance Transfer Credit Card
Balance transfer credit cards usually offer lower APR promotions that usually range from six to eighteen months for those who have good or better credit scores. This works by transferring the balance from your current credit card to the new credit card. Then, you pay off the debts interest-free. However, the rate will return to the credit card’s usual APR after the lower APR promotion period ends, which tends to be high.
It is essential to know that some lenders will charge you a balance transfer fee when you transfer the balance from your old credit card to the new one. Furthermore, unlike personal loans, credit cards don’t have any set repayment terms.
Use A Home Equity Loan
If you own a house and have sufficient equity, you can use it to pay off your existing debts. It can be done by applying for a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance loan.
There is a massive chance that you can get a loan with a low-interest rate since it is backed up by collateral. However, closing costs tend to be expensive. In addition, you might end up losing your house if you fail to pay.
It is best to consult a mortgage lender if you want to use this type of loan to consolidate your debts. That way, you will know what to expect concerning the closing costs. Also, you can check your budget to make sure you can afford the monthly payments conveniently.
Consider A Debt Management Plan
A non-profit credit counseling agency can help you with a debt management plan. They can provide you with a debt counselor that is an expert in analyzing your situation. If you opt to go with a debt management plan, you have to pay one monthly payment to the agency. After that, the agency will then process paying the creditors on your behalf.
Credit counselors can even help you get lower rates, negotiate lower monthly payments, and debt forgiveness for you. However, you may have to pay for a service fee monthly. Moreover, some may require you to close the credit accounts you are consolidating, which could hurt your credit score.
Make sure to find a reputable non-profit credit counseling agency accredited by the National Foundation for Credit Counseling. Also, don’t forget to keep the advantages and drawbacks in mind. Lastly, be sure to know all the terms if you want to consider a debt management plan to help you consolidate your credit card debts.
In consolidating your debt, it is vital to consider your current situation. Debt consolidation is best when you can land on a new loan or credit card with a low-interest rate. If not, that means you are bound to be in deeper debt. It’s advisable to do some research and think it through.
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