Should I Consolidate My Credit Card?

If you have at least one credit card balance that you carry from one month to another, you have a few options for ways to consolidate the debt. When you consolidate, you take out a new loan and use it to pay off the credit card debt. Each consolidation method comes with advantages and disadvantages that you need to weigh in light of your specific situation.

Balance Transfer

Perhaps the simplest way to consolidate credit card debt is to transfer it to a different credit card with a lower interest rate. This saves you money because more of your monthly payment can go toward paying down the balance you owe. You can also consolidate multiple balances onto just one card to simplify the process of paying bills. One downside is that you often have to pay a fee to transfer balances. Plus, if you transfer the balance to a new card with a promotional interest rate, this low rate does not last forever. In addition, if you are late on a payment, the interest rate will increase to a high penalty rate. However, if you can be disciplined with making payments, a balance transfer can save you money while you pay off your credit card.

Home Equity Borrowing

If you own a home, you could consolidate your credit card debt by taking out a home equity loan or line of credit and using that money to pay off the card balance. Home equity borrowing typically comes with a much lower interest rate than credit cards, and the rate does not expire like a promotional balance transfer rate would. The major downside of home equity borrowing is that it puts your home at risk because the lender can foreclose if you miss payments. Therefore, you should not consolidate with a home equity loan unless you are very confident you will be able to afford the payments.

Retirement Account

If you have a 401k account through your employer, you might be able to borrow from your account to pay off credit cards. You then have up to five years to pay yourself back with interest, all of which goes into your account. This is a low cost way to consolidate your debt. However, if you lose your job, you have to pay back the loan immediately or pay early withdrawal penalties. Plus, if your credit card debt is unmanageable and you are considering filing bankruptcy, withdrawing from your retirement account is a bad idea because the account is protected in bankruptcy

General Considerations

Before using consolidation as a solution for your credit card debt, consider how you accumulated the debt in the first place. If the debt results from patterns of overspending and not having a balanced household budget, consolidating will not address the root problem. You will likely find yourself needing to use the credit cards to continue supporting your spending habits, all the while accumulating more debt and increasing your monthly payments. If you consolidate, use this as a chance to create a balanced budget that includes your monthly debt payments and does not require the continued use of a credit card to make ends meet.