Credit card consolidation: Is it for you?
Although it sometimes feels like it, having credit card debt is not the end of the world. People who have a lot of credit card debt often consolidate their outstanding balances into a single, lower-interest loan to pay down their loans in less time. Credit card consolidation means that your debt across multiple credit cards is merged, giving you one monthly payment.
Credit card consolidation using a balance transfer
Using a balance transfer is one of the most common ways to consolidate credit card debt. This method requires you to open up a new credit card account to which you move your existing credit card balances. The new account might come with a lower interest rate, such as a promotional period with zero percent interest for up to 21 months.
The new credit card sets the limit for how much of the balance you can transfer to it, and the amount you qualify for depends on your credit score and income. Due to these limits, balance transfer cards are ideal if you have a smaller amount of debt. Before you apply for a balance transfer, however, you should be aware of what the new card’s annual percentage rate (APR) will be once the promotional rate ends. Most balance transfer credit cards charge a fee for transferring a balance from another credit card.
Consolidation using a personal loan
Taking out a personal loan is recommended for consolidating debts totaling over $15,000. Banks and other financial institutions offer personal loans to help people deal with outstanding credit card debt. The effectiveness of this method depends on the terms of the loan offer.
The benefit of this method is that it provides a higher credit line, sometimes $35,000. In addition, because these are not revolving loans, you don’t have to worry about credit utilization from this loan affecting your credit score. Just like credit cards, personal loans are typically given out based on your credit history and score. This means that the loan terms depend a lot on your credit history.
Some personal loans come with a prepayment fee, a charge for repaying the loan ahead of schedule. It’s also important to make sure you’re paying a lower interest rate than what you currently pay for your credit cards.
Consolidating with a home equity loan
Using a home equity loan to consolidate credit card debt is possible but not usually recommended. While you may be able to consolidate credit card debt at a lower interest if you borrow against the equity in your home, doing so could put you at risk. A home equity loan uses your house as collateral. If you fail to make payments, the bank can seize your house.
Besides being risky, a home equity loan comes with a lot of fees, which can increase the cost of the loan. These include things like home appraisal fees, annual fees, origination fees, and more.
Before you do anything …
Before getting a new loan or line of credit to consolidate debt, consult a nonprofit credit counselor. It’s also a good idea to ask your credit card issuer if it offers any hardship programs. If you are faced with extenuating circumstances, such as an illness or unemployment, some banks are willing to offer a special payment plan with a low interest rate.