Signing up for a new credit card often seems like a great idea, especially if you earn perks for doing so. But over time, it can be easy to inadvertently accumulate more accounts than is really comfortable to manage on a monthly basis. If you’re currently in this boat, it may make you feel less alone to hear the average American actually has three credit cards and 2.4 retail store cards, as cited by NerdWallet.
Trying to make decisions about how to pay off multiple balances — let alone stay on top of the amounts and due dates for each account — can derail your progress toward effectively working down your debts. It’s very common to find yourself “running on a treadmill,” or making the payments required to keep accounts current but not necessarily getting any closer to getting out of debt. In fact, the opposite can be true as credit card debt interest charges keep compounding.
Credit card consolidation aims to address these challenges of dealing with multiple accounts and high interest rates. Here are four ways to approach the consolidation process.
Open a Balance-Transfer Credit Card
We did cover some of the dangers of opening credit cards in the introduction. However, a balance-transfer credit card is not your typical card. Its purpose is to provide borrowers with a set introductory period without interest accumulating on the balance(s) they have transferred to the new card. Some common promotional periods you may find are six, 12 or 18 months.
Taking advantage of this introductory period to pay down your debt interest-free is crucial, as saving money requires offsetting the transfer fee — often somewhere in the ballpark of three to five percent.
Get a Personal/Consolidation Loan to Pay Off Credit Cards
Although qualifying for a personal or consolidation loan at a low enough interest rate is typically easier, credit card consolidation for bad credit is sometimes possible for those willing to shop around between lenders.
Whether or not a consolidation loan makes sense for you depends on a few things:
- Will you save money by bundling your current debts with a loan (taking fees and loan term into consideration?)
- Can you commit to steering clear of new debt until your loan is paid off? This sometimes takes five years or more, depending on your debt load.
- Can your source of income support fixed monthly payments for as long as it takes to be free and clear of the loan?
If you’re very interested in going this route but cannot qualify for low enough interest the traditional way, adding a co-signer to the loan or securing an asset may help — but be aware of the risks of doing either.
Borrow Against Home Equity
Do you own your home? Chances are borrowing money against equity you’ve built up — either in the form of a home equity loan or a cash-out mortgage refinance — will offer lower interest rates than credit cards will. However, you will need to factor in the closing costs to determine whether you’ll actually be saving money here.
Participate in a Debt Management Plan (DMP)
If consolidating debt on your own seems challenging at this point, meeting with a credit counselor can help you get an unbiased, professional opinion on your options. One of these options may be taking part in a DMP through that credit counselor, who would then attempt to negotiate better terms with creditors for you. You, in turn, would start making one monthly payment to the counselor for them to pass onto creditors.
Each consolidation strategy for credit card debt has its own set of advantages and disadvantages to consider. Having realistic expectations about what to expect will help you prepare and stay on course.
