Best Ways To Consolidate Credit Card & Other Debts

Debt consolidation is a strategy that takes multiple balances and rolls them into one monthly payment. If the new debt has a lower annual percentage rate, consolidating can reduce interest costs, monthly payment amounts, or the payoff period. 

Listed below are the five most effective ways to consolidate. Remember that the best way for you will depend on how much debt you have, your credit score, and other factors unique to your situation. 

A Balance Transfer Credit Card (also Called Credit Card Refinancing)

Here, credit card debt is transferred to a balance transfer credit card. These cards charge no interest for a promotional period (12 to 18 months). That’s why you should aim to pay off the balance you owe completely before the 0% intro APR period ends.

Note: Calculate whether the interest you save over time will negate the cost of the transfer fee before you pick a card. 

Pros:

– 0% introductory APR period

Cons:

– You need good/excellent credit to qualify.

– A balance transfer fee (3% to 5% of the amount transferred) usually applies

A Credit Card Consolidation Loan

Here, an unsecured personal loan with a lower APR from a bank, credit union, or online lender is used to consolidate debt. 

Look for lenders offering special features for debt consolidation, including:

– Pre-qualify without any impact on your credit score

– Direct payment to creditors

Pros:

– Fixed interest rate (your monthly payment won’t change)

– Low APRs (for good/ excellent credit)

Cons:

– Some loans have an origination fee

– Membership required to apply at a credit union

Tap Into Your Home Equity

Homeowners may be able to secure a home equity loan or line of credit. You’re likely to get a lower rate since the loans are secured by your house. This money can be used to pay off your credit cards or other debts.

Pros:

– Good credit may not be a requirement to qualify

– Payments are usually lower because of a longer repayment period 

Cons:

– A home appraisal is usually required – you need equity to qualify

– You can lose your home if you default

A 401(k) Loan

Taking out a loan from an employer-sponsored retirement account is not advisable. Consider it only as a last resort, as you may be left struggling with more debt.

401(k) loans are typically due in five years. However, if you lose your job or quit, they’re due on tax day of the next year.

Pros:

– Lower interest rates

– No impact on your credit score.

Cons:

– It can significantly impact your retirement.

– Failure to repay will result in heavy penalties and fees

A Debt Management Plan

This debt payoff tool consolidates several debts into one monthly payment at a reduced interest rate. In exchange, you start a payment plan that typically runs three to five years. It works best for those who don’t qualify for other options. However, bankruptcy may be better if your debt exceeds 40% of your annual income, and can’t be repaid within five years.

Pros: 

– A fixed monthly payment

– Can cut your interest rate by half or more

Cons:

– Startup and monthly fees are common.

– While on the plan, you generally can’t use credit cards or get new lines of credit

– Missing a payment may derail the plan