Credit Card Consolidation: How To Consolidate Credit Card Debt
We are a nation of debtors.
The defining feature of modern American life is the fact that everything necessary for survival — housing, education, health care, you name it — gets more expensive by the day while our wages stagnate or decline. Ergo, we get ourselves into credit card debt in order to keep the late capitalist wolves at bay. You may well be dealing with paying down multiple high-interest credit cards along with keeping all your other bills paid.
If this is the case, there are ways you can make your payments easier to handle by consolidating your credit card debts into a single debt with a lower interest rate. As it happens, there are multiple methods of doing this, each with its own advantages and disadvantages.
Table of Contents
Credit Card Consolidation: The Basics
Credit card debt consolidation is easy enough to describe. You borrow money to pay off your existing credit card debt, which results in you having a single debt to pay off rather than several. This single debt will typically have a lower interest rate than your original debts. This way, you’ll save money and make the repayment process more manageable.
Sounds great, right? Well, there are different ways to consolidate your credit card debt, and each method comes with its own upsides and downsides. We’ll get into these methods, but first, let’s discuss just who should be looking into credit card debt consolidation.
Who Should Consolidate Credit Card Debt?
When done right, consolidating your credit card debt should leave you in a better financial position than when you started and should make it easier for you to pay down your debt. But if you’re not in a position to be able to stop making new credit card charges, you won’t be any closer to your goal of paying off your debt. Likewise, a decent credit score is an unfortunate prerequisite for certain debt consolidation methods (like a personal loan).
While anybody buried under credit card debt can take advantage of one debt consolidation method or another, it’s important that the method matches your individual circumstances.
Common Debt Consolidation Pitfalls
Every debt consolidation method carries particular risks. For instance, consider the situation I outlined above. If you take out a personal loan to pay off your credit cards but then continue to rack up charges on your credit cards, you’ll have only added another debt to your debt pile with your personal loan.
Likewise, a homeowner may take out a home equity loan or line of credit and use the money to pay off credit card debts. But if — for whatever reason — you can’t make your HELOC payments, you could lose your home!
While there are a number of ways you can try to hoist yourself out of credit card debt, always be aware of the hazards associated with each method.
5 Ways To Consolidate Credit Card Debt
There are a number of tactics one can employ to tackle credit card debt, five of which I will detail here:
- Transfer your debt to a 0% balance transfer credit card
- Take out a personal loan
- Find a nonprofit credit counseling organization
- Take money out of a retirement account
- Take out a home equity loan or line of credit
Transfer Your Debt To A 0% Balance Transfer Credit Card
Certain credit cards are sold as debt consolidation tools. These cards will usually offer an introductory interest-free period (often 12-15 months but occasionally longer) on all credit card balances you transfer over to the card within a certain time frame (typically within 30-60 days of getting your card). If you manage to pay off your debt on the card within the interest-free period, you can avoid paying any further interest on your debt.
It’s one of the safer means by which you can consolidate your credit card debt, as you won’t be putting your house on the line or anything. However, these balance transfer credit cards often require good to excellent credit in order to qualify, thus excluding a lot of indebted people. What’s more, while these cards won’t charge interest on your balance transfers for a certain length of time, these cards often have a balance transfer fee of about 3%.
Additionally, the credit limit on your balance transfer credit card may not be high enough to accommodate you transferring all your existing credit card debt to the balance transfer card. If you have an enormous amount of credit card debt, it won’t be easy to find a balance transfer credit card that can accommodate all of it.
Another factor to consider: Some credit card issuers won’t let you transfer a balance to their card from another card of theirs. For instance, Chase won’t let you transfer a balance from one of their cards to another.
A good example of a balance transfer credit card is the Amex EveryDay card.
The card’s 0% APR on balance transfers lasts for 15 months and applies to all balances transferred over to the card within 60 days of getting your card. What’s more, all balances transferred over within the first 60 days will not have a balance transfer fee applied.
The 15-month 0% APR applies to purchases as well as balance transfers. In addition, you can earn rewards points for your spending. Many balance transfer credit cards lack a rewards program.
Take Out A Personal Loan
Personal loans can be obtained from a bank, credit union, or online lender and can be used to pay off your credit card debts. Your interest rate will typically depend on your credit.
Is a personal loan the right debt consolidation method for you? Unfortunately, it depends on your credit. Well-qualified applicants should be able to obtain a loan with a low interest rate that will save the borrower money on interest payments, while those with poor credit may have trouble obtaining a loan with an interest rate that won’t be so high as to negate the debt-consolidation benefits of the loan. If this is you, you may want to check with a credit union before you go to other types of lenders, as credit unions tend to be more likely to accommodate borrowers with low credit scores than other types of lenders.
Furthermore, some online lenders offer loans tailored specifically for debt consolidation.
Find A Nonprofit Credit Counseling Organization
If you’d like some personal attention to your specific debt situation, seek out a credit counseling organization. These organizations work with debtors on a one-on-one basis, offering advice and assistance in creating plans to help you climb out of debt. I would suggest looking for a nonprofit credit counseling organization accredited by the National Foundation for Credit Counseling (NFCC).
These organizations can help you set up a debt management program in which you make payments to the counseling agency in question. The agency then makes payments on each of your debts. They may even be able to negotiate lower interest rates or monthly payments for you.
The downsides to this debt consolidation approach are comparatively minor. You’ll probably have to pay a monthly service fee and a setup fee, and you may be required to close your credit cards after paying them off.
Take Money Out Of A Retirement Account
If you find that better debt consolidation options aren’t available to you, you can try borrowing from your employer-sponsored retirement account (such as a 401(k) or an IRA).
This isn’t a debt consolidation method of first resort, as the downsides are serious: you’ll have less money in your retirement account, you might have to pay income taxes and an early withdrawal penalty, and if you’re borrowing from your 401(k), you’ll have to repay the loan within 5 years (and if you lose your job, you’ll have to repay the loan within 60 days!). The consequences are worse if you can’t repay your loan. You’ll get hit with a big penalty as well as taxes on the unpaid balance, and you’ll be in more debt than ever.
Unless your circumstances are truly desperate, I wouldn’t recommend this method of consolidating your credit card debt!
Take Out A Home Equity Loan Or Line Of Credit
Here’s another high-risk debt consolidation method: You can borrow against the equity in your home (or possibly your vehicle) with a loan or line of credit. The repayment period can vary from 5 to 20 years but is commonly 10 years.
On the plus side, as this loan would be secured, you’ll get a lower interest rate than you’ll get with an unsecured loan, and you won’t need good credit. On the downside: if you can’t make your payments, you could lose your dang home!
Due to the manifest risk, this is another debt consolidation method of last resort. You don’t want to put your house at risk unless you’re supremely confident in your ability to repay the loan. And even then, you could still end up being wrong!
Next Steps: What You Should Do After Consolidating
Once you’ve consolidated your credit card debt, be sure to monitor your credit score regularly. Thankfully, there are ways to do this for free and without hurting your credit score.
Of course, along with monitoring your credit score, you’ll want to try to improve it! One way to do this is to simply make timely payments on all your debts (including credit card payments, obviously). Whenever you can, set up automatic payments.
One piece of advice typically given in this situation is to just cut back on your spending. However, given the skyrocketing cost of merely existing in this predatory world (much less raising kids, etc), this advice can be unrealistic and smacks of privileged condescension. Nevertheless, if you do spend a significant amount of your income on non-essential purchases, you might want to re-evaluate your spending habits!
The right debt consolidation strategy is invaluable when you’re trying to claw your way out from under credit card debt. The key is to find the strategy that best fits your particular circumstances. Merchant Maverick is here to help you in your quest!