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7 Ways to Consolidate Credit Card Debt – Forbes Advisor

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Credit cards are a great tool for earning a variety of credit card rewards like cash back or miles for travel. They provide a source of emergency funds for “rainy days” and can help lay the groundwork for credit to make room for future purchases like a car or house. Sometimes life goes by and now you are stuck with multiple credit cards with varying balances. Planning and executing a strategy to pay off those debts can be daunting, but it can be done.

Credit card debt consolidation is a strategy in which multiple credit card balances are combined into one balance. This makes it easier to follow up as there is only one monthly payment and one due date to consider. These consolidation strategies often come with a lower APR which will save you on the total interest paid and allow you to pay off the balance faster.

With several methods of consolidating and paying off these debts, the best method may be different from person to person. Today, we’re exploring some common and uncommon ways to approach debt consolidation.

Find the best credit cards for 2021

No credit card is the best option for every family, every purchase or every budget. We’ve selected the best credit cards in a way designed to be most useful to the widest variety of readers.

Personal loans

One of the most common ways to consolidate your credit card debt is to contact your local bank or credit union and apply for a debt consolidation loan. Application processes can often be completed over the phone or online. The great thing about these loans is that they often offer flexible terms (usually 12-60 months) and establish a consistent monthly payment due, which makes budgeting easier. As an added bonus, some financial institutions will make a payment directly to creditors, saving you the hassle.

Be aware that your interest rate is likely determined by the length of the loan and your credit score. Loans may also be subject to origination fees, which are in addition to the overall cost of the loan.

Often times, the four big metrics used in loans are income, credit rating, total assets, and total debt. Some underwriters, like the online lender Upstart, add a few non-traditional steps to their loan approval process. During the underwriting process, parameters such as education level, current length of residence, and even employment history can lead to an approval that a bank may not have. This is especially useful for new borrowers who may not have an established strong credit profile.

There are a few downsides, such as the potential for upfront costs and fewer loan terms to choose from. The rates are comparable for those with a good credit rating, but could be much higher if your credit rating is bad.

Debt Consolidation Programs

A debt consolidation program is usually a service where your credit cards are combined into one payment. From there, you’ll usually make a single payment to the program, which then passes the payment on to your creditors. Do not confuse this with a debt consolidation loan, where a loan is given that pays off your existing debts. Your existing debts are still there, but are generally more manageable.

Ideally, your monthly payment for your program is lower than for making all of your payments individually. It also means that more of the payment goes to pay off your existing debts. Debt consolidation programs work with your creditors to help lower interest rates on debt and eliminate variable costs such as late fees, although none are promised. Some debt consolidation programs may also require you to close some or all of the cards you are consolidating, so be sure to check to see if you are going this route if your goal is to hold onto your cards.

The National Foundation for Credit Counseling is a great place to start as a not-for-profit option, although other options can be explored. Keep in mind that while the ultimate goal of all of these programs is to create a payment plan that’s right for you, some come with setup fees or variable monthly fees. This should be factored into your decision to choose who to go with.

0% APR Deals on Credit Cards

Many credit cards offer an introductory 0% APR offer on balance transfers for a limited time after opening the card. While they may still be subject to a balance transfer fee (typically 3% to 5% of the consolidated balance), they often offer 0% introductory periods between twelve and eighteen months so you don’t have to worry of the balance accumulating additional interest.

The Citi® Diamond Preferred® card, for example, is a great option for those considering going this route. It comes with a respectable 0% introductory APR for 21 months on qualifying balance transfers from the date of the first transfer and a 0% introductory APR for 12 months on purchases onwards. the date the account was opened. After that, the variable APR will be 13.74% to 23.74% depending on your creditworthiness. Balance transfers must be made within 4 months of opening the account. There is a balance transfer fee of $ 5 or 5% of the amount of each transfer, whichever is greater. The downside is being capped at the allocated credit limit given by Citi.

Keep in mind that good to excellent credit is recommended if you plan to apply for a credit card with a 0% introductory period.

Second mortgage or HELOC

If your home has appreciated in value over time, or the balance has been paid off by a fair amount, using your home could be a way to consolidate debt. Taking out a second mortgage or using a Home Equity Line of Credit (HELOC) is actually using your home as collateral to pay off other debt.

Since there is an underlying asset for these loans, the rate is often lower than what you would get with a personal loan, reducing monthly payments and paying off the balance faster. There could be additional mortgage related expenses on this route, so it is essential to inquire directly with your lender.

Take out a 401 (k) loan

We generally do not recommend withdrawing money from retirement savings in all but the most urgent circumstances. Ideally, a 401 (k) loan would not be your first choice for debt consolidation. That said, it does offer a few advantages.

Taking out a loan against your employer sponsored 401 (k) is one way to get a lower rate than a personal loan, and this strategy can generally help your overall credit profile. Taking out a loan with your own 401 (k) doesn’t require a credit check, so it shouldn’t affect your credit score. During this time, the debts you pay off with the loan will improve your credit rating.

Just understand that leveraging your 401 (k) reduces your retirement fund and that high fees can be charged if you are unable to repay the loan. The payback time may also be accelerated if you lose or change jobs.

Peer-to-peer loan

Another way to access funds for a consolidation loan is a peer-to-peer loan. Peerform, a market lending platform, brings together those looking for loans with those looking to invest. The idea is to create a “win-win” situation. The loan to consolidate debt into one easy monthly payment and an investor looking for a stable and attractive return on their investment.

Equity in owned vehicles

If you have a vehicle that’s paid off or has a low balance compared to what it’s worth, this might be a worthwhile route to take. Taking out a loan, using your vehicle as collateral, would allow you to obtain a loan to repay your other creditors. In this situation, you have the option of receiving an auto loan rate which is generally much lower than that of an unsecured personal loan.

The downside here would be a limitation of the loan capped at the value of the vehicle. Additionally, when taking out a car loan, most lenders require full auto insurance coverage on the vehicle, which could increase monthly expenses if they normally carry a PLPD. Having said that, it’s a great way to leverage an asset to get a lower loan rate.

Find the best credit cards for 2021

No credit card is the best option for every family, every purchase or every budget. We’ve selected the best credit cards in a way designed to be most useful to the widest variety of readers.

Final result

Credit cards and their associated rewards programs can be amazing for earning and saving for the next vacation or just putting a little extra back in your pocket. However, getting over your credit card debt can be draining and void all the points, miles, and cash back rewards earned on them. Exploring options to eliminate this debt quickly and within your means can go a long way in helping you gain financial freedom and get back to using your credit cards effectively.