3 ways to consolidate credit card debt
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Credit cards can be useful financial tools. Unfortunately, they can also cause financial difficulties if you don’t pay your balances on time. According to the Consumer Financial Protection Bureau (CFPB), Americans paid an estimated $120 billion in credit card interest and fees from 2018 to 2020, averaging about $1,000 a year for each household.
With 83% of adults owning at least one credit card and most having an average of 3.84 credit card accounts, it’s easy to see how many people accumulate debt. If you keep credit card balances month-to-month, these three credit card consolidation strategies can help you save money and pay off your debt sooner.
A personal loan is one way to consolidate credit card debt. Believable makes it easy View your prequalified personal loan rates from different lenders, all in one place.
1. Refinance with a balance transfer credit card
Although it may sound contradictory, you can use a credit card to pay off your credit card debt. With a balance transfer credit card, you can consolidate your existing credit card debt onto a single, new credit card.
Refinancing with a balance transfer credit card can be one of the options The cheapest way to pay off credit card debt when used effectively. Many credit card companies offer incentives for opening a fund transfer credit card, such as B. An introductory 0% APR on balance transfers for a period of time. This allows you to pay off your credit card debt with a single monthly payment, with no further interest.
However, you usually need excellent credit to qualify for a card with a 0% APR offer, and you only get this incentive for a limited time. If you have outstanding balance at the end of the promotional period, interest will accrue at the card’s regular rate, which can be high. You may also incur balance transfer fees, which typically range between 3% and 5% of each balance you transfer.
Talk to your credit card issuer about possible options Negotiate your credit card debt before taking out a new card. But be aware that paying less than you can on credit cards or other types of debt can adversely affect your credit score.
2. Take out a debt consolidation loan
A debt consolidation loan is an unsecured personal loan that you can use Consolidate multiple sources of high-yield debt, like credit cards. These loans usually have a fixed interest rate, require no collateral, and have fixed monthly payments. They can also help improve your credit score by lowering your credit utilization and complementing your credit mix (the different types of credit products you have).
If you have good credit, you may be able to get a lower interest rate on a debt consolidation loan than what you paid for on your credit card. The better your credit rating, the lower the interest rate you will get.
However, you may have to pay fees if you take out one Debt Consolidation Loansuch as initiation fees for processing the loan or prepayment penalties for early repayment of the loan.
Consolidating multiple monthly payments into a single payment can help you better manage your debt. Follow these steps to a Debt Consolidation Loan:
- Check your credit. Request free copies of your credit reports from the top three credit reporting agencies by visiting AnnualCreditReport.com. Correct errors on your credit report and consider upgrading your credit score before applying for a loan if doing so could get you better terms.
- Browse around and compare. Compare debt consolidation loan rates from multiple lenders, both online and from your bank or credit union. By comparing their interest rates, terms, fees, and other factors, you can choose the loan that offers the most benefits for your unique situation.
- Apply. Once you’ve selected a lender that works for you, it’s time to officially apply for the loan. You will need to provide documentation to confirm your employment and income, e.g. B. Payslips and W-2s. If you’re having trouble qualifying yourself for a debt consolidation loan, explore the option of adding a co-signer to your application. It can increase your chances of approval and help you get a better interest rate. Keep in mind that using a co-signer financially obliges them to pay back the loan if you don’t. Missed payments also negatively affect their credit score.
Believable makes it easy Compare personal loan rates from different lenders and it will not affect your credit score.
3. Use the equity in your home
You also have the option of using the equity in your home to pay off your credit card debt. You can do this in two ways: through a home equity loan or a home equity line of credit (HELOC).
- A home loan Often referred to as a second mortgage, it allows you to borrow no more than 80% of your home’s equity. Home equity loans usually have fixed interest rates and must be repaid by a specified date. This loan is secured by your home, which means your lender can mortgage your home if you don’t pay it back.
- A HELOC is similar to a credit card: you can use this revolving line of credit several times up to a certain amount. As with home equity loans, this financing is secured by your home, meaning you could lose your home if you don’t repay the line of credit. Unlike home equity loans, HELOCs often have variable interest rates and payment schedules, making it harder to plan a consistent repayment schedule.
The CFPB notes that many people won’t be able to reduce their overall debt by taking on more debt unless they also reduce their overall spending, although using your home’s equity is one way to consolidate your debt .
Ways to stay debt free
Effective debt management is the first step stay debt free in the future. Here are some ways you can stay debt free in the future:
- Create a budget. Write down all of your monthly expenses and subtract that amount from your gross monthly income. This will give you an idea of where your money is going. Look for additional ways to save or places where you can cut back on expenses to save even more. Review your budget regularly to see if you need to make any changes to stay on track.
- Focus on building your savings. The aim is to save up three to six months’ living expenses in an emergency fund. If you have unexpected expenses in the future, you can use money from your emergency fund to cover them instead of taking on additional credit card debt. Consider asking for a raise at work or taking a part-time job so you can start saving even faster.
- Consider nonprofit credit counseling. A credit counselor from a nonprofit agency can discuss your financial situation with you. They’ll help you develop a personalized plan and give you the tools to stay out of debt. Free or low-cost counseling services are available from many credit unions, nonprofit agencies, and religious organizations. You can also contact your local attorney general to find reputable credit counselors in the area where you live.