5 Best Ways to Consolidate Credit Card Debt
The average credit card interest rate in late 2017 was 13.08 percent, according to the Board of Governors of the Federal Reserve System. At that rate, your credit card debt would double in less than six years. For people with bad credit, that rate could be even higher.
Even if you’ve got good credit and a high credit score, consider debt consolidation if you’re struggling with paying off debt. Technically, debt consolidation is simply the process of rolling multiple debts into one, but the true objective of a debt consolidation loan is to lower your overall interest rates and payments. Take a look at the best ways to consolidate credit card debt.
5 Credit Card Debt Consolidation Options
Each of the following options for credit card debt consolidation one has strengths and weaknesses — there is no “one size fits all” method that is the single best way to pay off credit cards. Consider your personal financial situation when reviewing the features and benefits of each of these ways to roll all your debt into a single bill payment.
Here are five credit card debt consolidation options that you can consider when paying off credit cards:
1. Balance-Transfer Credit Cards
Balance-transfer credit cards are one of the easiest ways to consolidate credit card debt. Many cards offer 0 percent balance transfers for an extended period. The Citi Simplicity card, for example, offers a 21-month balance transfer period at 0 percent, and numerous other cards routinely offer low- or no-interest transfers for 12 to 18 months. The savings can be dramatic: An individual with $10,000 in credit card debt could accumulate an additional $1,300 or more in interest after just one year, versus $0 on a balance-transfer card. But when that promotional period ends, rates can jump up dramatically — to as high as 25.24 percent in the case of the Citi Simplicity card.
Pros
Interest savings
Additional features and benefits, such as extended warranties on purchases with some cards
Cons
Potentially high rates after the promotional period ends
Balance transfer fee of $5 or 3 percent, whichever is more
Check Out: 10 Best Balance-Transfer Credit Cards
2. Personal Loans
Using a personal loan to pay off credit cards can be a good option for consolidating debt, especially if you have a relationship with a bank and can qualify for a lower rate. Most banks offer unsecured, personal credit card loans to qualified borrowers, and this can be a good way to consolidate your outstanding debts into a single, bank-issued loan. Wells Fargo, for example, offers loans from $3,000 to $100,000, with no personal collateral required. Rates are fixed, unlike credit card interest rates which typically are variable and can go up in a rising-rate environment.
Pros
Fixed interest rate
Lower rates than credit card rates
With some banks, no consolidation or loan origination fees
Cons
Rates might be higher than 0 percent credit card balance transfer offers
Related: Best Personal Loans for Debt Consolidation
3. Debt Management Plans
A debt management plan is not a loan but rather a financial arrangement you make with a credit counseling company. The company will negotiate with your creditors on your behalf to arrange a repayment plan that lowers your outstanding balance, your interest rate or both. Then you make a monthly payment to the credit counseling company for a specified term until the agreed-upon amount is paid off. Although this might sound like a panacea, entering a debt management plan can trigger negative credit ramifications.
Pros
Reduced payment amount or interest rates
One monthly payment for all your outstanding debts
A freeze on your accounts so creditors don’t pursue legal action against you
Cons
Damage to credit history
Damage to relationship with lenders
Payment of fees to credit counseling company
4. Home Equity Line of Credit
You can borrow against the equity in your home to pay off your credit card debt. Your new home equity loan will require just one monthly payment, and you’ll often be able to get a rate lower than the average credit card interest rate. In one sense, you’re borrowing from yourself if you take out a home equity line of credit, since you’re borrowing the equity in your own home. But you’ll still be dealing with a third-party lender, which leads to the main negative of a HELOC — you’re putting up your house as collateral. In the event you can’t pay back your loan, your home might face foreclosure.
Pros
Lower rates than credit card interest rates
Cons
Might pay loan origination fees
Putting up house as collateral is dangerous if you can’t make the payments
Learn: How to Get a Home Equity Loan When You Have Bad Credit
5. Borrowing From a 401k
Individuals with a 401k plan can usually borrow up to half the value — to a maximum of $50,000 — for hardship purposes, which are defined by each individual plan sponsor. One of the key benefits of a 401k loan is that the money you repay — both principal and interest — goes directly back into your account. The interest rate you pay usually is low, and the loan doesn’t appear on your credit report. But you might forgo long-term gains in your retirement account by borrowing the money for a short-term problem. Failure to pay back the loan results in ordinary income tax and early withdrawal penalties on the full amount of your outstanding loan.
Pros
No lender — repay yourself
If loan is repaid, no early withdrawal penalty if younger than age 59.5
Lower interest rates than credit cards
No credit ramifications if you default
Terms of up to five years
Cons
Default can trigger taxes and penalties
Loss of interest while money is out of the account
Must repay loan within 60 days of losing or changing jobs
Keep Reading: The Best Ways to Pay Off Every Kind of Debt
This article originally appeared on GOBankingRates.com: 5 Best Ways to Consolidate Credit Card Debt
