Tips for Consolidating Your Debt

 

Credit cards are a necessary convenience in our lives. It is a good source of rewards such as cash back and miles for travel and provides cash during emergencies, not to mention its foundational role in making future decisions such as buying a home.

Unfortunately, sometimes you may end up with multiple credit cards, and tracking their balances becomes challenging. In addition, with time, you may have overdrafts that accrue into debts that have to be paid or seek credit card debt forgiveness.

Experts advise consolidating these debts into one balance and paying them off as soon as possible to avoid debt build-up. There are several ways that you can use to settle your credit cards debts. This article highlights key strategies that you can implement depending on your financial situation.

But firstly, what is debt consolidation?

What’s debt consolidation?

Debt consolidation is adding up debt balances from different credit cards into a single balance.

It has several advantages;

  • Smoothens the debt tracking process
  • You get to pay lower interest on consolidated balances
  • Consolidated balances come with lower APR

Working with a loan officer or a credit counselor when consolidating your debt balances is advisable. But, of course, you can take the DIY route. Once consolidated, you can draft an actionable strategy such as making a monthly payment to the card with consolidated balances.

Now, let’s take a look at actionable credit card consolidation strategies that you can implement today;

Refinance with a balance transfer card

Credit card refinancing transfers balances from an overcharged credit card to a balance transfer credit card that doesn’t charge interest for a promotional period. To apply for a balance credit card, most banks require an excellent credit card score, at least 690 and above on the FICO scale.

In addition to interest remission, most balance credit card issuers do not charge transfer fees, and where one is charged, it is never more than 5% of the transferred amount. Therefore, the transfer fee is a consideration when choosing a balance card issuer.

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Unfortunately, the 0% APR period only lasts for a short while, between 12 to 18 months, in most issuers. Therefore, it would be best if you aimed to pay up your balance before this period elapses to avoid paying the standard credit card interest rate.

Pros of credit consolidation

  • Has a 0% APR period

Cons of credit card refinance

  • Has high credit score requirements
  • Most have a transfer fee which is added to the debt
  • High APR after the introductory period

Use a personal credit card consolidation loan

You can acquire an insecure personal loan and use it to consolidate all debts, including credit card debts. Banks, credit unions, or online lenders often issue these loans that offer lower APR on your debt.

Credit unions are a better option as they offer simpler loan terms and are not-for-profit financial institutions. They also offer loans to members with bad credit scores, sometimes even lower than 689 on the FICO scale.

Credit unions also have fixed APR rates, with Federal credit unions charging only 18%.

Alternatively, you can seek a personal loan from a bank, but you will need an excellent credit score. If you already are a bank customer in good standing, you may get higher bank loan amounts with lower APR rates.

Online lenders can also provide personal debt loans, with most letting you prequalify for a loan without impacting your credit card score.

Pros of using credit card consolidation loan

  • Fixed interest rates don’t change your monthly payments
  • Low APR from banks and Online lenders
  • Some lenders offer direct payment to creditors

Cons of using credit card consolidation

  • Hard to get a loan with bad credit
  • You have to pay an origination fee
  • Some lenders lend only to registered members
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Consider 401(k) Savings

Taking money from your retirement savings should be your last option, and we highly discourage our clients from this strategy. However, if you are backed into a corner, a 410(k) loan could be your only way out.

You can take the 401(k) loan against your employer-sponsored 401(k), which has lower APR rates than a personal loan. Additionally, the loan doesn’t require a credit check and has no impact on your credit score.

Unfortunately, the loan reduces your retirement funds and may incur hefty fees if you cannot repay on time.

Start a debt management plan

The whole idea of credit card debt consolidation is to allow you to work out a debt management plan. Sit with a debt expert who can help analyze your earnings against the debt and help come up with an actionable debt management plan.

Most lenders, especially banks, offer debt management plans to roll your debt into a single monthly payment with reduced rates without affecting your credit card score. In addition, if you cannot repay your loans within five years, you may file for bankruptcy or credit card debt forgiveness.

Pros

  • Fixed monthly payments
  • Reduces interest rates by half
  • It does not affect your credit score

Cons

  • Have startup and monthly fees

Tap into home equity

Homeowners can take a loan on their home’s equity and use it to pay their consolidated debts. You may also consider your home equity as a line of credit that works like a credit card with a flexible interest rate.

You are likely to get lower interest rates since your house secures your loan than personal or credit card loans. However, you may lose your home if you cannot repay the loan.

Pros

  • Lower interest rates
  • A credit card score does not count
  • Have long repayment periods
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Cons

  • Requires home equity to qualify
  • Can you lose your home if you can’t pay up

Peer-to-peer lending programs

Peer-to-peer lending brings loan seekers and investors together. These investors provide the much-needed credit, which is lent to the borrowers who pay it back with interest creating a win-win situation.

Cons

  • Peer-to-peer lending often charges high-interest rates and transfer fees.

Equity in owned vehicles

You can also take a loan on your vehicle if it is fully paid up. The vehicle acts as collateral and allows you to pay off other creditors. The main advantage is that auto loans have lower rates than unsecured personal loans.

However, your loan amount is capped at the value of your car at the end of the expected loan period. You may also have to present full auto insurance coverage, which increases your monthly expenses.

Should you consider credit card debt consolidation?

Absolutely!

The main advantage of credit consolidation is to minimize interest rates by reducing the number of credits card debt balances. In addition, the organization provides an easy way out to get debt-free. It is advisable to work with an expert debt counselor while analyzing your options.

Key Takeaway

Credit cards have amazing rewards and numerous financial advantages. However, if you don’t keep track of your card balances, you may negate the value of your credit score, miles, and cashback that you earned over the years.

Debt consolidation is one of the many strategies you can put in place to get yourself out of credit card debt. The strategy has several options that you can explore as you work with a trusted debt advisor to become debt-free.

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