If your wallet is stuffed with credit cards that are nearly maxed out, the good news is, there are proven methods you can use to turn things around and get out from under that burden.
If you have a lot of credit card debt, you should look into consolidating it. Credit card consolidation is when you borrow money at a low interest rate and use that loan to pay off the balances from your high-interest credit cards. You can save a ton of money on interest payments, and you free up cash to pay off debt faster.
Here are five different ways to consolidate your credit card debt:
Below shows you some options to consider, but keep in mind your ultimate goal is to borrow money at a low interest rate so you can knock off high-interest debt.
1. Get a Personal Loan
Personal loans tend to have lower interest rates than credit cards, so many people will take out a personal loan to pay off existing debts. Just make sure you’ll be able to repay the lender a fixed amount every month for the term of the loan.
The pros: You can often apply for a personal loan without hurting your credit score, and you don’t need a high score to qualify.
The cons: These loans also usually have an upfront origination fee, and interest rates vary based on your credit score. Someone with a “good” credit score (between 700 and 749) can expect fixed rates anywhere from 6% to 36%.
With that kind of rate variation, it’s important to shop around for a loan. There are many companies to look into, like Lance Advisors for help on financial advice if a personal loan is right. Credit unions are another option to find lower interest rates.
2. Use a Balance Transfer Card
If you have been keeping up with payments on all those cards and your credit is good or excellent, another option is to apply for a zero- or low-interest credit card, then transfer the balance from your high-interest cards.
Usually, balance transfer credit cards offer a 0% interest rate on transfers for 12 to 21 month.
The pros: If you can pay it off during the promotional period, you’ll pay no interest.
The cons: If you don’t make it, a high interest rate usually kicks in. Also, many cards will charge you a balance transfer fee — usually something like $5.
3. Borrow or Withdraw From Your Retirement Plan
Most financial advisers like Lance Advisors will tell you that this is a bad idea, because it will impact your retirement savings.
The rules of a 401(k) loan:
- You can borrow as much as half the balance of your employer-sponsored 401(k), up to $50,000, without penalty.
- You can only withdraw money you contributed to the plan; you can’t withdraw your employer’s match.
- You typically have to repay the loan within five years.
- If you leave your job, you’ll have to pay back the loan within 60 days or take the amount as a heavily taxed distribution.
The pros: Good option if your credit isn’t that great and a personal loan interest would be very high. You won’t be taxed if you repay the money within the term.
The cons: You give up any growth that money lost during that time. For loans that can’t be paid back on time, a 10% penalty and taxes on the amount come April.
4. Borrow Against the Value of Your Home
If you own a home, you could also consider getting a home equity loan or line of credit.
Typically, because you’re borrowing against your equity, these carry lower interest rate then other loans.
With a home equity loan, you’re borrowing a fixed amount of money, and you receive in a lump sum. You pay it back at a fixed interest rate over a set period of time, like three or five years.
In a home equity line of credit, you have more flexibility. You can borrow money whenever you need it, using your home as collateral.
The pros: The interest rate will almost certainly be lower than what your credit cards are charging you, and the term is longer — up to 15 years.
The cons: You are putting your house at risk and the interest rate you’re paying on the money you borrowed may go up or down on a home equity line of credit, depending on how financial markets are doing.
5. Debt Management Program
A debt management program helps with your credit card consolidation. These are offered through credit counseling companies.
You are assigned a credit counselor, who sets up a repayment and education plan for you. They negotiate a better interest rate and lower fees with your credit card companies.
The pros: A debt management program pays your creditor for you, so they make sure you stay current on the monthly payments of your debt. .
The cons: If you miss a payment, you can be dropped, and you’ll lose all the benefits you gained.
Tip: Look for nonprofit financial education institutions like the National Foundation for Credit Counseling to avoid getting scammed.