Several different options exist for credit card consolidation, each with its own benefits and drawbacks. By understanding all of your options, you will be able to make a decision about what action to take to lower your debt. The key is to make sure you're saving money by consolidating; otherwise, you may be doing more damage.
Home Equity Loan
A home equity loan or line of credit is money borrowed against the value of the home you own. The loan is secured by your home, which means that if something bad happens to you financially and you cannot make payments on your home or your loan, you could lose both. Although home equity loans and lines of credit may be tax-deductible in some instances, it's vital to sit down with an accountant to determine if the deduction makes fiscal sense.
Zero-Interest Card
For those who want to consolidate but don't have property to secure a loan, zero-interest rate credit cards are a short-term solution. However, the zero percent interest rate is an introductory offer made to lure new consumers. You need to know what the interest rate will be when the introductory offer expires. Credit union manager Chris Viale explains in a Bankrate article that those using this method must calculate how much above the minimum you must pay each month to be freed from your debt within the introductory offer time frame. Continuously opening new cards to utilize the zero percent interest rate offers will damage your credit in the long run.
Debt Consolidation Loan
A debt consolidation loan is an unsecured loan, meaning that the amount and interest rate you qualify for are determined by your credit score. Debt consolidation offers and advertisements are abundant and they draw in applicants by promoting low interest rates. Unless you have stellar credit, you're not likely to qualify for those rates, so you need to get an estimate on the rate you do qualify for before applying. It's possible that your current creditors could lower your interest rates enough that consolidating isn't worth the effort.
Considerations
Many financial advisers view credit card consolidation as fighting fire with fire. If you're in the red because you've misused your credit cards in the past, simply obtaining more credit is probably not going to be able to do anything but contribute to your debt. Before you consider consolidation, work on a budget and make a firm commitment to become debt-free. Reputable credit counseling organizations, such as those recommended by the National Federation for Credit Counseling, may be able to help you with budget creation, consolidation and other debt repayment options.
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