5 Ways to Consolidate Credit Card Debt
If you have debt on multiple credit cards, credit card debt consolidation is one strategy that can help you get your financial life under control.
In fact, credit card debt consolidation can ease your stress in two ways. First, you’ll make one payment per month instead of four or five. And second, you could get a much lower interest rate to pay off your debt, saving you money.
If that sounds like a relief, read on for five ways to consolidate your credit card debt:
- Use a credit card with balance transfer.
- Get a debt consolidation loan.
- Discover loans between individuals.
- Use a home equity loan or line of credit.
- Work with a credit counseling agency.
1. Use a credit card with balance transfer
If your credit score is still good enough, a balance transfer credit card might be right for you. You’ll need a very good to exceptional FICO score, which means you might need at least 740 or more, to qualify for the best balance transfer cards. Lenders also use your credit report and application information to make a decision, so your supporting data could help you get approved.
Currently, major balance transfer credit cards offer 0% annual percentage rates with introductory periods of 12 to 21 months. If you qualify, this is a golden opportunity to pay off your debt without paying interest. As long as your credit limit is high enough to cover the total amount you want to transfer, you’re in business.
But you must follow two basic rules to avoid trouble. First, you must determine your monthly payment in order to pay off your debt before the end of the introductory period. If your new card has a balance transfer fee, which can be up to 5%, you must include this fee in the total amount you must repay.
Here’s an example: Let’s say you transfer a total of $10,000 to a card with an introductory period of 18 months and a transfer fee of 3%. You’ll need to pay $572.22 each month to pay it off before the end of the introductory period ($10,300/18 = $572.22).
At the end of the introductory period, you will begin to pay interest at the current rate on your balance. If you can’t pay off the debt before the 0% APR ends, figure out how much you can pay per month to reduce your debt.
The second rule is that you cannot use your balance transfer card for new purchases. Sometimes your new balance transfer card will also offer a 0% introductory rate on purchases. Do not be seduced by this offer. You can use this card for new purchases when you are debt free.
Even if your score isn’t high enough to get an introductory 0% APR offer on a balance transfer card, you might still qualify for a balance transfer card that has a lower APR than you have. currently on your credit cards.
I know a lot of people are struggling with high prices right now. Inflation in June 2022 reached a new level 40 years tall by 9.1%. If you’re in a position where you can start reducing your debt, consolidating multiple credit card balances into one monthly payment can save you time and money.
You won’t get a 0% APR like you would with a premium balance transfer card, but you’ll likely get a better rate than what you currently have on your credit cards. And best of all, you can get a fixed rate.
The actual interest rate you will get will vary depending on your creditworthiness and your lender. That’s why it’s important to shop around and compare rates. Insider Tip: Make your purchases within two weeks so it counts as one serious request instead of multiple requests. Hard demands can lower your score by up to five points, so this strategy limits the damage to your score.
As with credit cards, loan companies look at more than your score. For example, debt consolidation loan companies look at your credit report, debt ratio, employment history, and income.
Even if you don’t have a good credit score, go ahead and do some research to see if you can find lower rates than what you currently have on your credit cards. This alone can help you save a lot of money.
Another option for credit card debt consolidation is peer-to-peer lending. P2P loans, also called social loans, do not come from traditional lenders, such as a bank. Each platform is a little different, but P2P marketplaces are basically for borrowers with people who want to invest their money in giving you a loan.
If your loan is approved, rates can be quite low, especially if you have very good credit. Every P2P lender has a minimum required credit score, which can be as low as 580, but for many P2P lenders you will need at least 640. As with other types of credit, if you are approved with a fair credit, your interest rate could be high.
Keep in mind that P2P websites operate differently and have varying requirements for credit scores, loan terms, fees, and other factors. Be sure to read the FAQ section to understand how each company handles loans.
If you are in debt on high interest credit cards, it is possible to get a home equity loan and use it to pay off your credit card debt. Interest rates for those with good credit can be quite low.
With a home equity loan, you get a fixed amount and the loan is secured by your home. You will have a monthly payment over a fixed term. The wrong side? If you can’t make the payments, you could lose your home.
A home equity line of credit is different from a home equity loan. A HELOC is similar to a revolving line of credit. You borrow as much as you need (within your credit limit) and make payments on the amount you borrow. The wrong side? Again, if you can’t make the payments, you could lose your home.
What if you’re so in debt that you can’t make monthly payments even though you’ve consolidated your debt? You probably think you have to deal with it on your own, but you can ask the National Credit Counseling Foundation. It takes courage to ask for help, so don’t see it as a weakness.
You can speak to a counselor for free and discuss options to help you get out of debt. Simply speaking with a credit counselor will not lower your credit score. But if you finally decide on a course of action that includes, say, a debt management plan, your score will take a hit. But keep in mind that the most important thing is to get out of debt. Over time, your credit score will rebound as you rebuild your credit.
Can you borrow from your 401(k)?
I’ve seen many articles suggesting that you can use your 401(k) to pay off credit card debt. Just because you box withdrawing or borrowing money from your retirement account doesn’t mean you should. I don’t recommend raiding your 401(k) unless your specific situation somehow makes it your only option.
At first glance, it seems easy to justify borrowing from your 401(k). If you are borrowing money, your interest rate will most likely be lower than what you would get with other personal loans. But there is reason to be careful.
If you cannot repay the loan within the five-year period, you will have to pay penalties and fees. And if you lose your job, the loan must be repaid by tax day the following year.
If you get a 401(k) match from your employer, don’t mess with it. This is a huge benefit for employees, and you should take advantage of it. Some of these plans do not allow you to continue contributing to your 401(k) if you borrow from it. In this scenario, you also lose your employer’s matching contribution. You are essentially giving up free money.
And one more thing. You will decrease your retirement account. This may not seem so important if you are years away from retirement. But the way to have money later is to save money now.