How to Consolidate Credit Card Debt

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Credit card consolidation means consolidating all of your existing debt 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 Gives You Only One Monthly Payment And Can Help You pay off credit card debt once and for all

Read on to find out about the best ways to consolidate debt and how each option can affect your credit rating.

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Consolidation with a personal loan or debt consolidation loan

Many banks offer loans to individuals, and some banks combine debt consolidation loans into the same category. Consolidation credit card loans and personal loans can be unsecured – you don’t need to provide any assets as collateral for an unsecured personal loan – while others are secured by assets or property like a car or home.

Pros of Using a Loan to Consolidate Credit Card Debt

  • All credit card payments are replaced with one monthly payment.

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

  • No collateral is required for an unsecured personal loan.

Consulting on Using a Loan to Consolidate Credit Card Debt

  • Interest rates may not be low enough to change anything.

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

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

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Consolidation with balance transfer proposals

Credit card companies sometimes seduce you transfer balances from your credit cards at a high rate… Balance transfer credit cards usually offer a special interest rate for a specific period if you pay on time. You make at least the minimum payment every month to your balance transfer card, but you can always pay in addition to get out of debt faster.

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

  • A promotional interest rate can save you a lot of money.

  • Transferring the balance to an existing credit card saves you the hassle of having to query your credit report.

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

  • You will most likely pay a transfer fee of 2 to 5 percent to the balance transfer card, but depending on what debt you have and your interest rate, this option may be cheaper than paying interest.

  • If you are applying for a new credit card, a request will appear on your credit report.

  • Late payment can jeopardize your special interest rate.

  • A new credit card may encourage you to spend money.

Consolidation by borrowing against the security of your home or car

You can pay off or pay off your credit card debt with a loan secured by your home or car. To qualify, you will need to fully own your car or have at least 20% of your home equity in your home.

Pros of Borrowing Secured Home or Car for Credit Card Debt Consolidation

  • By using your home as collateral, you can choose between a home equity loan or a line of credit. With HEL, you have a fixed interest rate and a maturity period, usually five to 10 years. With HELOC, you have a “draw” period when you can use the money up to the credit limit and only pay interest on the amount you used.

  • Lower interest rates help you pay off debt faster.

  • Making payments on time improves your billing history on your credit report.

Advice on a loan secured by your home or car to consolidate credit card debt

  • If you do not pay your debt, the bank may seize the house or the car you offered as collateral.

  • You will most likely pay the closing costs of your HEL or HELOC loan, which will cut your savings by consolidating your credit card debt.

Pay off credit card debt with retirement money

You can use your retirement egg pay off credit card debt. With an IRA or 401k, you can withdraw money without penalty if you are 59 and a half years old. Alternatively, your employer may allow you to take out a five-year loan up to 50 percent of your $ 401,000 guaranteed balance sheet.

Pros of Using Retirement Funds to Consolidate Credit Card Debt

  • Borrowing or withdrawing from your retirement account does not require bank approval and does not affect your credit rating.

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

Consolidating the use of retirement funds to consolidate credit card debt

  • You will pay a hefty price if you take early withdrawals from a qualified retirement account.

  • You cannot make additional contributions to offset the loan or early distribution, so you lose the tax benefit on that money forever.

  • Your 401k loan can be paid off immediately if you change jobs or get fired.

  • The loss of investment value can outweigh the benefits of credit card consolidation.

Learn about: 27 best strategies to get the most out of your 401 (k)

Consolidate by borrowing money from friends and family

Borrowing from family and friends offers a wide range of possibilities, as your family and friends are not bound by the same formalities as a bank. But you must put everything in writing so that later there will be no disagreements.

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

  • There is no loan application process.

  • The money you borrow won’t show up on your credit report, so paying off your credit cards will lower your credit utilization rate and help boost your credit score.

  • Your family or friends may offer you a loan with low or interest-free income to help you save money as you get out of debt.

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

  • Not everyone has family or friends who can lend.

  • Relationships can be strained if you are unable to pay off the debt.

  • Timely payments will not appear on your credit report and will not affect your credit score.

Choosing the best option for you

Before you rush into more or more debt, carefully weigh the pros and cons of the various credit card debt consolidation options. Everyone’s situation is different, so the best way to consolidate debt by another person may not be realistic for you.

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Last updated: April 21, 2021

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

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