Imagine trying to carry your groceries inside without using bags. It’d be a hassle, to say the least — and there’s a good chance some items would topple out of your arms on the long walk to the kitchen. Plus, you might need to take more trips back and forth to carry a similar number of products. Well, perhaps unsurprisingly, this is a metaphor representing the difference between trying to pay multiple unsecured debts individually versus bundling them into some form of consolidation.
The general idea behind debt consolidation is to make things simpler — to streamline the very process of paying down debts. Another upside to the process is the potential of reducing how much you end up paying in interest charges over time. It’s at least worth learning more about anything that can possibly make it easier and less expensive to get rid of your credit card debts, right?
Here’s a more in-depth look at four of the leading credit card debt consolidation options.
Option #1: Balance Transfer Credit Card
If high interest rates on your credit cards are holding you back and you have a good credit score, a balance transfer may be just the ticket to grant you a break from growing interest.
What’s the difference between this new balance-transfer credit card and your existing cards? As Bankrate explains, most balance transfer cards come with zero-percent APR for at least six months — with some even offering interest-free promotional periods longer than a year.
During this special period, all the money you funnel toward your balance actually goes toward your principal balance rather than servicing interest. You may also be able to combine multiple cards onto just one balance-transfer card, making it more straightforward to pay these balances down.
Option #2: Personal Loan
Using the funds from a credit card debt consolidation loan can allow you to pay off all your outstanding balances in one go, often for a lower interest rate. Credit cards tend to carry average interest rates in the teens, while consolidation loans can range from about 5 percent to as high as 36 percent.
This makes this approach most advantageous for borrowers with strong credit scores who can qualify for the lower end of the APR spectrum.
Option #3: Debt Management Plan
Working through credit counseling agency on a debt management plan means a few things:
- You will start making one monthly payment to the agency — which will then pay your creditors rather than you continuing to do so.
- The agency may be able to negotiable better payment terms, like getting rid of certain fees or lowering interest rate.
- You can generally expect to make these monthly payments for three to five years.
- Most agencies charge service fees to enroll, but you may still save money depending on your situation.
Option #4: Cash-Out Refinance
Another alternative to juggling high-interest credit cards is borrowing against the equity you’ve built up in your home. In particular, cash-out refinances pay the borrower the difference between their former mortgage and new mortgage which can then be used to pay off higher-interest debts. The biggest possible boon here is that the interest rates tend to be much lower than on credit cards. However, the biggest risk is that you are borrowing more money using your home as collateral.
All these options for consolidation take different approaches to similar goals: trying to minimize interest and maximize convenience while paying off credit cards. Which approach is best geared toward your needs depends on everything from your credit profile and income to how much you are trying to consolidate.
