That stack of credit card bills you’re facing each month doesn’t have to be a dominating factor in your life. The key is to catch the problem before it becomes a drain on your credit score. With a strong rating from the credit reporting bureaus you can combine all of those bills into one and come out ahead in a number of different ways.
Here’s how to get a fresh start with credit card consolidation.
What Credit Card Consolidation Does
You can more easily qualify for a lower interest rate with a strong credit score.
The interest rate reduction will make it less expensive to repay your credit card debt. In most cases, credit cards carry an APR (annual percentage rate) of between 16 and 20 percent. Meanwhile, you can get a personal loan at a rate of nine percent or less with a good credit score. The trick is to be sure the interest rate on the consolidation loan is lower than the average rate you’re paying on the debt you consolidate.
Another way credit card consolidation helps is reducing the number of payments you make each month. In most cases, when you roll all of those obligations into one instrument, you’ll get a lower monthly payment as well. Moreover, you might even find you’ll pay those debts off sooner once they’re consolidated.
Types of Consolidation Loans
Credit card consolidation can take many different forms. Among the most common methods are balance transfer credit cards, personal loans and borrowing against the equity in your home.
Balance Transfer Cards allow you to combine as many of your outstanding credit card balances as the new card’s limit will allow onto a single card. In most cases, this will come with an introductory offer of a fantastically low interest rate — sometimes even zero percent — for a period of up to 20 months or so.
This represents an outstanding opportunity to payoff your debts interest free.
However, you must be careful to only transfer an amount you can pay off in full during that 20-month period. Interest rates on these cards skyrocket when that window of grace closes. Moreover, they are sometimes applied retroactively to the entire transferred balance — from the date of the original transfer.
Personal Loans for credit card consolidation can come from a bank, a credit union, an online lender, or even friends and relatives. Secured only by your promise to pay and your good credit history, personal loans will typically carry a slightly higher rate of interest than home equity loans. Of course, they’re less risky as well. You’ll only destroy your good name if you default on an unsecured personal loan — as opposed to losing your home.
Home Equity consolidations can come in the form of a cash-out refinance or a home equity line of credit. Either method taps into the value you have when your house is worth more than you owe on your mortgage.
That difference can be extracted and used to pay off credit card debt by taking a loan against your equity for the amount you need to satisfy the debts. You can also take a line of credit backed by the value of your home to pay off the debts.
Interest rates are much lower than personal loans and you don’t have to worry about the grace period ending as you would with a balance transfer. However, you could lose your house if you find yourself unable to repay, as it must be pledged as collateral to secure these loans.
A Word of Caution (OK, a few words actually)
The bottom line here is you can get a fresh start with credit card consolidation. However,it’s best to do so while your credit history is still good. You also need to choose your vehicle carefully, to avoid the potential pitfalls we outlined above.
One more thing, stop using your credit cards while you’re paying off the consolidation loan. A fistful of credit cards with zero balances can be a tough temptation to resist. However, it’s the only way to get a truly fresh start.
