You’re sold on debt consolidation as a strategy to make bill paying easier, faster and less costly. But what form of debt consolidation is best? Good question. Here are some strategies for consolidating credit card debt.
What is Debt Consolidation?
It’s basically when you roll multiple high-interest, unsecured debts into one monthly payment, hopefully at a lower interest rate than the one you’re paying in the aggregate on current obligations. In fact, garnering a better rate is the only way the approach makes sense.
A key draw is the ability to pay just one bill per month, as opposed to several of various amounts and due dates. The best method of consolidation — for you — hinges on factors such as your debt load and credit score.
Home Equity Loan or Credit Line
If you own a home, you might be able to use the equity to get a loan or line of credit –and use that to clear your credit cards or other debts.
A line of credit is like a credit card with a variable interest rate. With a home equity loan, you’ll typically make interest-only payments during what’s called the draw period – usually the first decade. What that means is, you must fork over more than the minimum payment due to shrink your principal and eat into your overall debt during that period.
You’ll get an awesome rate because the loans are tied to your home. However – and this is big – if you default, you could lose that crib.
You can take out such a loan, which is really an unsecured personal loan, from a bank, credit union or online lender. Again, you want to get a better interest rate than you’re now paying.
For credit card consolidation, credit unions are typically more lenient, eligibility-wise. But if you have a good relationship with your bank, do try there as well. Online lenders are popular because, with just a soft credit pull, which doesn’t hurt your scores, they can give you some idea of what kind of loan you qualify for.
Your credit score is key here if you want a better rate than what you have now.
Balance Transfer Card
Credit card companies sometimes issue what are called 0%-interest balance transfer cards for an introductory or promotional period. You can shift your high-interest credit card debt onto this card to save money and pay down your debts faster. The rub is that you do need good credit, at least, to qualify for one of these cards. You also must be able to pay off those transferred debts before the introductory period ends and your rate goes back up.
Debt Management Plan
Here, you’ll roll multiple debts into a single monthly payment at a lower interest rate. You’re a prime candidate for this approach if you’re having a hard time erasing your credit card debt but are ineligible for alternative options due to a low credit score.
The good news is that DMP plans don’t touch your credit score. If your debt exceeds more than 40% of your earnings and can’t be satisfied within five years, then a debt management plan may be for you. Such a plan is usually put together by certified credit counselors, along with you and your creditors.
Now you’re apprised of strategies for consolidating credit card debt. Take care to size up your situation and pick the best approach for you, knowing that consolidation, overall, is a proven means of handling your obligations.