Debt consolidation not only puts multiple credit card balances into just one account to simplify the payment process, but it can also lower the monthly payment amount or secure a lower interest rate. Consumers have several options for how to consolidate credit card debt and the best option varies depending on the individual's circumstances and desired outcomes.
Balance Transfers
Most credit cards allow cardholders to transfer a balance from another card. If you have a credit card with a large enough credit line to hold all of your balances, transfer them to simplify the payment process. However, the balance transfer might require a fee, in which case the fee should be less than the difference between the credit card interest rates to make sense.Another option is to apply for a new credit card that offers a low introductory rate for balance transfers. If you repeat the process and transfer the balances to another card before the promotional rate ends, you can keep paying very low rates. However, opening many new credit cards can hurt your credit score.
Home Equity Borrowing
If you own a home and have equity, meaning that the home is worth more than the outstanding balance on your mortgage, you can borrow from your home equity to consolidate credit card debt. Lenders offer home equity loans and home equity lines of credit to qualified borrowers who meet the lender's credit criteria. Home equity borrowing typically costs less than carrying credit card balances and it can also result in lower payments by stretching out the repayment over a longer time period. However, if you default on a home equity loan, you can lose your home. In contrast, credit card companies cannot go after your home if you default on credit card payments.
Personal Loan
Credit counseling companies often lead consumers to take out an unsecured personal loan, also known as a signature loan, to consolidate credit card debt. Credit unions also often offer these loans to members. The loan might have a lower interest rate than the credit cards, depending on your credit. You should be able to get a loan that lowers your monthly payments by extending the repayment term. However, be aware that paying back debt quickly saves you the most money in the long term because you do not owe as much for interest.
Other Options
Many other types of lending are available for consolidating credit card debt. For example, if you have an employer-sponsored 401(k) plan, you can usually borrow from the money you have saved there and repay yourself. However, this can backfire if you lose your job and must repay the loan immediately. If you have a life insurance with cash value, you might be able to borrow from that, which reduces the amount your beneficiaries would receive unless you repay it. You might even have friends or relatives who are willing to lend you money to pay off credit cards. In this case, work out a payment plan and follow through on your commitment so you do not ruin the relationship.
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