Are you carrying a lot of credit card debt? Do you die a little on the inside every time one of your credit card payments is due? Are you tired of making payments and feeling like your balance hasn’t budged?
You’re not alone.
The typical American has about $5,315 in credit card debt, and the typical card has an average annual percentage rate (APR) of 16.28%. Add student loans, auto loans and other expenses to the mix, and life starts to feel really expensive.
Let’s say you had that $5,315 credit card debt distributed over two different cards with the same interest rate and never used any of those cards again. If you paid $115 a month between the two cards, it would take you 6 years to pay off the balance and cost you almost $3,000 in interest.
That’s like 60% interest over the life of the loan.
If you want to pay down your balances faster and save tons of money on interest, credit card debt consolidation can help. It takes a bit of research, but you can use these seven tips to get started.
Tip #1. Understand How Debt Consolidation Works
Debt consolidation combines multiple balances into a single debt on a new card or personal loan, combining all of your monthly payments into one monthly payment. Here’s an example:
You have three credit cards with balances that total $15,000 and have an average interest rate of 22%. You pay $415 a month on those cards. At that rate, it would take you 5 years to pay off your balances and you’ll end up paying $9,822 in interest!
If you transferred the three balances to a personal loan or a credit card with a much lower interest rate of 8%. You’d pay off the same $15,000 balance in 4 years, making $366 monthly payments. Plus, you’ll only pay $2,577 in interest for a savings of more than $7,000 in interest.
Tip #2. Learn About Credit Card Balance Transfers
With good-to-excellent credit, you can use credit card balance transfers as a consolidation option. And with some skillful navigation of these balance transfer offers, you may be able to completely avoid interest payments.
What kind of interest rates can you get with a balance transfer?
Many credit card companies offer a tempting mix of generous credit card terms to attract new borrowers and keep current customers from switching to a new card.
It’s not uncommon to get card offers with introductory periods of 6 – 18 months and low or 0% interest rates. You may even get balance transfer checks in the mail to encourage you to move your balances to the new card.
Balance transfers have their perks: You can consolidate your card balances, make a single monthly payment and maybe even enjoy interest-free credit for several months.
But they do come with some terms and conditions.
The minimum monthly payment required for most credit cards is usually between 1% – 5% of your outstanding balance. Even with 0% interest, that’s not going to be enough to put a significant dent in your debt before the introductory rate expires.
Let’s say you transferred your hypothetical $15,000 balance to a new card with a 0% APR for 18 months, and the minimum payment is 1% or $150 a month.
After 18 months, you will have only paid off $2,700 of your $15,000 balance and you’ll be left with a balance of $12,300, a higher interest rate and a larger monthly payment.
To get a bigger bang for your balance transfer, you’ll need to commit to paying more every month. If you could make a monthly payment of $833, you’d be debt-free before the end of the 18 months.
What are the fees?
When shopping for balance transfer cards, don’t forget about fees – especially balance transfer fees.
Balance transfer fees range from 3% – 5% and are standard for most of these offers. For our hypothetical $15,000 that’s an extra $450 – $750 added to your balance right out the gate. So shop carefully for the lowest percentage.
And the terms and conditions are worth a read for any other potential charges, like annual fees, late payment fees, over-the-limit fees and other penalty fees. Many cards also charge foreign transaction fees and cash advance fees.
What else do I need to know?
Your bank or other credit issuer has an established relationship with you. If it’s a good one, your chances of approval for their other cards are higher than with a new lender. However, before applying, check whether you can transfer balances between cards from the same issuer.
Once you’ve settled on a balance transfer credit card, evaluate which balances you may safely transfer. Credit lines vary. Take any balance transfer fees into account. Make sure that the new card limit will accommodate the other card balances and the fees.
Tip #3. Consolidate Credit Card Debt With a Debt Consolidation Loan
There’s no difference between a personal loan and a debt consolidation loan. It all comes down to how you use the loan, and personal loans can be a good way to consolidate debt.
A personal loan gives you a one-time lump sum of cash that you can use to pay off your current debts. Because it’s a loan, your monthly repayments are fixed and your interest is usually fixed. If you can, automate your payments – you’ll never forget to pay on time. These loans are typically paid off in 3 – 5 years.
Shop for personal loans with banks, credit unions and online lenders. Start with your financial institution. But remember, just because you’re eligible doesn’t mean that it’s the right loan for you.
Shop around for the best product, rate and term. Look out for interest rates and eligibility requirements. Also, keep in mind that you may need to pay loan origination fees to the lender to process your application. These fees can equal between 0.5% – 2% of the loan amount.
If you have good credit, use it to your advantage. The better your credit score, the higher your chances of negotiating a great rate.
Speaking of your credit score, avoid too many hard inquiries. It may temporarily lower your credit score. Take advantage of prequalification options and soft pulls instead. Before applying, be sure the loan amount and terms are tailored to your needs.
How do credit card consolidation loans compare to balance transfer card offers?
Compare paying $15,000 on your refinancing credit card to paying it off with a personal loan:
- Personal loan: If you take out a personal loan at 9.5% for 4 years, the resulting payment is $377 per month. The total interest paid will be $3,089. So you’ll pay a total of $18,089.
- Credit card balance transfer: Make the same $377 monthly payments on a credit card with an 18-month introductory period with 0% interest. Over those 18 months, you’ll have paid off $6,786. Once the balance transfer offer expires, you’ll start paying interest on the remaining $8,214 balance.
Assuming an interest rate of 16%, if you continue to pay $377 a month, it will take you an additional 26 months to pay off the balance. After 44 months, you will have paid at least $1,414 in interest, totaling $16,414.
In this case, the balance transfer method has got a slight edge.
Of course, many variables affect these numbers. For example, you don’t have a fixed interest rate with a credit card. When it goes up, you pay more in interest and take longer to pay the balance. With a credit card, you also need the willpower to make the $377 payment each month.
Additionally, you may be eligible for lower or higher interest rate cards and loans. Researching and comparing your options is essential.
There are many cases where a personal loan may be the better option and others where a balance transfer credit card delivers more benefits.
Tip #4. Take Out a Home Equity Loan
If you’re a homeowner and you’re making regular mortgage payments, you’re building equity in your home. Equity also grows as the value of your home increases. Your equity is what’s left when you subtract the amount you owe from the value of the property.
If your home is valued at $300,000 and you owe $225,000, your equity is $75,000. You can use that equity as collateral to borrow money.
This may be a suitable option for credit card debt consolidation if your credit isn’t awesome. That’s because home equity loans are secured loans (your home is your collateral), so they generally offer better interest rates than unsecured loans like credit cards.
However, these loans may include a costly home appraisal and thousands in closing costs. Also, the lender can foreclose on your home if you don’t make your payments.
So do your research. Review closing costs, terms, your budget, and any other important factors with a mortgage lender before deciding.
Tip #5. Borrow From Your 401(k) With a Retirement Account Loan
Have you and your employer been putting money away for your retirement?
While withdrawing funds from an employer-sponsored 401(k) or 403(b) retirement account is a less popular way to access money for debt consolidation, this method lets you lock in better interest rates than personal loans and balance transfer cards, and it doesn’t impact your credit score.
You also have up to 5 years to repay the loan.
This strategy has its downsides:
- You can’t borrow more than half of your vested account balance, with a $50,000 maximum. If you default on the loan, the IRS treats it as a distribution. That means paying expensive penalties and taxes.
- You’ll have to pay the loan back sooner if you leave your job or you’re fired. After leaving the job, the loan becomes due when your income tax is due.
- Borrowing from your 401(k) or 403(b) slows the growth of your retirement funds. That may mean less to live on after retirement or having to delay retirement.
- Finally, it might not be possible. Some employers don’t permit retirement account loans.
Tip #6. Consider Debt Management Plans From a Nonprofit Credit Counseling Agency
If none of the other strategies for paying off credit card debt work for you, consider credit counseling. A certified nonprofit credit counselor can provide education and guidance to help you consolidate your balances and take control of your finances.
Financial advisors gather information about your income, expenses, debts and assets. They review your financial habits to help you identify potential issues and create a realistic budget.
For debt consolidation, the counselor negotiates with lenders on your behalf to lower your interest rates for debt management. They design a payment plan that lets you make a single payment to the agency each month. In turn, the agency uses those funds to pay your creditors.
Repayment plans typically span 3 – 5 years. The agency usually charges a monthly service fee that’s included in your debt payment. Most plans include closing the accounts you’re paying off. They report all this activity to the credit card bureaus, so your credit score may take a hit.
Tip #7. Look Into the Avalanche and Snowball Strategies To Pay Off Credit Card Debt
Personal financial management is a skill, which means you can learn how to rock it! There are two key strategies used to tackle debt: the debt snowball method or the debt avalanche method.
Debt snowball method: Build up momentum
Pay down credit card debt efficiently by starting with the smallest balance. Continue paying the minimum on all but the card with the lowest amount of debt. Focus on paying that card off quickly with the biggest payments you can afford.
Once the first card is paid off, move to the card that now has the lowest balance. Keep making minimum payments on the others. Make the largest payments possible on the lower balance account until you pay it down completely. Move to the next one and repeat until all your card debt is paid.
Debt avalanche method: Start off with a bang
This method focuses on the card with the highest interest rate. It’s a lot like the snowball technique, but with the avalanche method you prioritize high interest rates over low balances.
Pay down your highest interest rate credit card ASAP while making minimum payments on your other balances. Move to the next highest interest rate card after the first one is paid. Keep going this way until they’re all paid down.
If your debt isn’t overwhelming, compare the effectiveness of both methods first. Then choose the one that offers the most savings.
Should I Consolidate My Credit Card Debt? Yes, if You’ve Done The Research
Consolidating your credit card debt can put you on the road to financial freedom. But it’s not the perfect solution for every debt situation. Carefully assess and evaluate your options before incurring new debt to pay off old debt.
Things to consider and research:
- Your budget
- Loan and credit card eligibility requirements
- Rules and regulations
- Pros and cons of each method
- Repayment term
- Potential outcomes
Talk to your creditors. They may be willing to work with you. Question potential new lenders to get the most accurate information possible about their loan and credit line options.
Your goal is to pay off balances faster – and save money while you’re doing it. The most important deciding factor is whether you can qualify for a lower interest rate to achieve that financial goal.
Experian™. “Average U.S. Consumer Debt Reaches New Record in 2020.” Retrieved October 2021 from https://www.experian.com/blogs/ask-experian/research/consumer-debt-study/
Federal Reserve System. “Consumer Credit – G.19.” Retrieved October 2021 from https://www.federalreserve.gov/releases/g19/current/default.htm
Internal Revenue Service. “Retirement Topics – Plan Loans.” Retrieved October 2021 from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-loans