Credit card debt is on the rise. Millions of Americans are in over their heads. Theyâre losing sleep, losing control, and worried about what the future will hold. But there are solutions, and consolidation is one of the best.
Consolidation works by âconsolidatingâ multiple debts into one. Itâs the perfect solution for mounting debt, one that doesnât destroy your credit score, liquidate your assets, or make it difficult to acquire mortgages and personal loans in the future.
With that said, letâs look at some of the best ways to consolidate credit card debt.
The idea of debt consolidation essentially boils down to acquiring a large, low-interest loan and using that to repay multiple high-interest debts. If your credit score is high enough, you can get that loan yourself, clear your credit card debts, and then focus on repaying the loan.
The average credit card APR is close to 20%. If you have a balance of $10,000 and a monthly payment of $300, this APR will cost you over $4,700 in total interest and your debt will be repaid in just over 4 years. If you were to acquire a $10,000 personal loan at a respectable rate of 8% over the same 4 years, youâll pay just under $1,800 in interest.
Thatâs a saving of nearly $3,000 over 4 years, and itâs based on an 8% rate (lower rates are available) and on the assumption that you donât accumulate any credit card penalty fees or penalty APRs, which are very common on rolling balances.
Credit counseling agencies can help you manage your debt by working with your creditors. A new payment structure will be created, and your money will go straight to the agency, after which it will be released to your creditors.
To begin the process, search for reputable debt management services in your area. They will assess your situation and determine if you are a good fit for the program. Some charge fees, some donât, but all will serve as an intermediary between you and your creditors.
Every month you will make a single payment and the money will then go to your creditors. The agency will negotiate reduced payments by bringing the interest rates down and removing fees, therefore making these debts cheaper and more manageable.
A balance transfer is a promotion offered on new credit cards. It invites you to move your balance from your current card to a new one, and in exchange, it offers a period of 0% interest.Â
You will need to pay a balance transfer fee, and this is typically charged at between 3 and 5% of the total transfer amount, but itâs often one of the cheapest and easiest ways to consolidate credit card debt.
As an example of how balance transfers work, letâs imagine that you have three credit cards, each with a maxed-out balance of $10,000 and an APR of 20%. If youâre repaying $300 a month, thatâs $900 a month and in 4 years and 2 months, youâll pay around $14,000 in interest to clear the full $30,000.
Alternatively, you can move all three balances onto a single balance transfer card with a $30,000 limit. Immediately, that balance could grow to $31,500. If you continue paying $900 a month and the balance transfer period lasts for 18 months, the balance will be just $15,300 when interest begins to accrue again. And if you use that 18-month period to initiate a debt repayment strategy, you could clear it in full and avoid paying any interest.
Some companies offer specific loans tailored toward debt consolidation. These options work a lot like personal loans, as they are large loans designed with consolidation in mind. However, there are a few key differences, including the fact you donât need an excellent credit score.
The ultimate goal of debt consolidation loans is not to save you money in the long-term or to reduce the debt period. In fact, it does the opposite. The goal is to reduce your monthly payment and give you a smaller rate of interest, but it does this while increasing the loan period, which means you ultimately pay more money over the term.
If you have a supportive and financially-free family, you can ask them for the money to clear your debts and then promise to repay them in time.Â
Of course, this option isnât without its problems. Firstly, thereâs the old adage that you should never lend money to friends or family. It may seem pretty heartless, but itâs a saying steeped in experience. It causes problems, as that debt is right at the bottom of the borrowerâs list of priorities and if theyâre skipping payments and begging for relief, while at the same time buying new clothes and going out every night, it can anger the borrower.
To avoid these issues, agree to pay them in monthly installments, offer a little interest, and get everything in writing. Make that debt your priority, because by skipping your payments youâll be hurting your finances and your relationships.
Donât guilt-trip a friend or family member into lending you money. Donât ask them unless you have a very close relationship with them, have known them a long time, and know they can easily afford to lend you money. The last thing you want is for them to leave themselves short or to acquire debt just to help you out.
Alternatively, if you own a significant amount of home equity, you can opt for a home equity loan. This will give you a sizeable loan charged at a small rate of interest. It will take longer to repay your mortgage, but by reducing your debt demands youâll save more money in the long-term.
How to Consolidate Credit Card Debt is a post from Pocket Your Dollars.