How to Consolidate Credit Card Debt

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Credit card consolidation refers to the consolidation of all of your existing debts into one loan, which is different from debt restructuring, which involves renegotiating the terms or amounts of your debt. Using credit card debt consolidation as a debt management tool only gives you one monthly payment and can help you pay off credit card debt once and for all.

Read on to learn the best ways to consolidate debt, and how each option can affect your credit score.

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Consolidate with a personal loan or debt consolidation loan

Many banks offer personal loans, and some banks put debt consolidation loans in the same category. Credit card consolidation loans and personal loans can be unsecured – you do not need to deposit any assets as collateral for an unsecured personal loan – while others are secured by assets or property like a car or house.

Benefits of Using a Loan to Consolidate Credit Card Debt

  • All of your credit card payments will be replaced with one monthly payment.

  • You save money when the interest rate on your personal loan is lower than your credit card interest.

  • You do not need any collateral for an unsecured personal loan.

Disadvantages of Using a Loan to Consolidate Credit Card Debt

  • Interest rates may not be low enough to make a difference.

  • You may not be eligible for a personal loan if you have excessive debt or bad credit.

  • The lender can charge you a commitment fee of 1 to 5 percent of the loan amount.

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Consolidate with credit transfer offers

Credit card companies sometimes trick you into transferring funds from your high-priced credit cards. Prepaid credit cards usually offer a special interest rate for a period of time as long as you pay on time. You make at least the minimum deposit on your credit transfer card every month, but you can always pay extra to get out of debt faster.

Benefits of Using a Balance Transfer Card to Consolidate Credit Card Debt

  • The promotional rate can save you a bundle.

  • Transferring the credit to an existing credit card saves you from having to query your credit report.

Disadvantages of Using a Balance Transfer Card to Consolidate Credit Card Debt

  • You’ll likely pay a 2 to 5 percent transfer fee on the prepaid transfer card, but depending on your debt and interest rate, this option can be cheaper than paying interest.

  • When you apply for a new credit card, a request will appear on your credit report.

  • A delay in payment could endanger your special interest rate.

  • A new credit card could tempt you to spend money.

Consolidate by borrowing against your home or car

You can pay off or pay off your credit card debt with a loan backed by your home or car. You must fully own your car or have at least 20 percent equity in your home to qualify.

Benefits of borrowing against your home or car to consolidate credit card debt

  • If you are using your home as collateral, you can choose between a home loan or a line of credit. With a HEL you have a fixed interest rate and a fixed repayment period, usually five to ten years. With a HELOC, you have a “draw period” during which you can use money up to your credit limit and only pay interest on the amount you have drawn.

  • Lower interest rates will help you pay off your debts faster.

  • On-time payments improve your payment history on your credit report.

Cons of borrowing against your home or car to consolidate credit card debt

  • If you default on your debt, the bank may seize the house or car you offer as collateral.

  • You will likely pay the closing costs on a HEL or HELOC loan which will reduce your savings by consolidating your credit card debt.

Pay back credit card debt with pension money

You can tap into your retirement to pay off credit card debt. With an IRA or 401k, you can withdraw money with no penalty if you are at least 59 ½ years old. Alternatively, your employer may allow you to take out a five-year loan against up to 50 percent of your 401,000 vested account balance.

Benefits of Using Pension Funds to Consolidate Credit Card Debt

  • Borrowing or withdrawing from your retirement account will not have any bank approval requirements or affect your creditworthiness.

  • The interest you pay on your 401k loan goes back into your 401k.

Cons of Using Annuity Funds to Consolidate Credit Card Debt

  • You pay a high price for early withdrawals from a qualified pension account.

  • You can’t make additional contributions to make up for a loan or early distributions, so you lose the tax breaks on that money forever.

  • Your 401k loan can become due immediately if you change jobs or get fired.

  • The depreciation of the investment could outweigh the benefits of credit card consolidation.

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Consolidate through borrowing from friends and family

Borrowing from family and friends offers the most varied of options, as your family and friends are not bound by the same formalities as a bank. But you should put everything in writing so that there are no differences of opinion later.

Benefits of borrowing from friends or family to pay off credit card debt

  • There is no loan application process.

  • The money you borrow won’t appear on your credit report, so paying off your credit cards will reduce your credit load and improve your credit score.

  • Your family or friends may be willing to offer you a low or no interest loan to save money as you get out of debt.

Disadvantages of borrowing from friends or family to pay off credit card debt

  • Not everyone has family or friends who can make loans.

  • Relationships can be strained when you can’t pay back your debt.

  • On-time payments won’t show up on your credit report or help your credit score.

Choose the best option for you

Before diving into any more or other debts, carefully weigh the pros and cons of the various credit card debt consolidation options. Everyone’s situation is different, so choosing the best debt consolidation method for you may not be a realistic option.

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Last updated: April 21, 2021

This article originally appeared on GOBankingRates.com: How to Consolidate Credit Card Debt

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