Need-to-Know: How to Consolidate Credit Card Debt
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It’s easy to get yourself into money trouble—especially when you’re spending on credit cards and aren’t looking at your bills until the end of the month (and realise you can’t actually pay off the full amount… uh-oh). Many people look into how to consolidate credit card debt when they have unpaid balances on multiple accounts. To give you a snapshot of Americans’ current spending issues, a whopping 35% have their debt in collections. While discussing the topic of debt consolidation, we’d be doing you a major disservice if we didn’t mention that while the process of transferring debt into one account works for some, it actually just makes it worse for others.
“Most of the time, after someone consolidates their debt, the debt grows back,” warns Dave Ramsay, an American businessman and author who has personally experienced crippling debt. “Why? They still don’t have a game plan to pay cash and spend less.”
Before doing anything, it would be wise to consider a debt management plan in which you work with a credit counselor to lower your interest rates or have fees waived on your separate accounts (these experts have “ins” you won’t be able to get on your own). But if you really would like one lower payment for convenience—and don’t mind a potential hit to your credit score—then you can move onto debt consolidation. Below, find out how to consolidate credit card debt and decide which of the four options, if any, is the best fit for you.
OPT FOR A BALANCE TRANSFER
Basically, this option allows you to transfer over all of your credit card balances into one credit card account. Here, you need to consider two things while making your decision: what the balance transfer fee is per credit card balance and how long you’ll have 0% APR (it’s typically for a specific, predetermined period).
You need to weigh the perks here. If you can pay down your balance quickly, then you don’t need low interest for a while. On the flip side, if you need more time to make payments, you might prioritise 0% APR for a longer period (with higher transfer fees).
GET A PERSONAL LOAN
This is no doubt going to cost you more money than getting a balance transfer card, especially if your credit score isn’t superb. To put things into perspective, data from the Federal Reserve in the US shows that if you took out a two-year loan, the average interest rate would be 10%, compared to the 0% you’d get for a fixed period on a bank transfer card.
TAKE OUT A LOAN ON YOUR HOME EQUITY
If you’re a homeowner, another potential option would be to take out a home equity loan so your debt is consolidated with a lower interest rate over a longer period of time. Although this sounds very tempting, it’s also a very easy way to go bankrupt and have your house taken away by the bank if you’re not able to keep up with your payments.