|How to Consolidate Credit Card Debt and Pay It Off|
The 2016 Q3 financial account report from the Federal Reserve shows Americans owe $12.35 trillion total in all debts. Of that, $747 billion is owed on credit cards.
That’s a lot of debt and a lot of credit card debt. So it’s no surprise paying down debt is the number one money resolution for 2017, according to Student Loan Hero’s New Year’s Resolution survey. If you feel like you’re drowning in credit card debt, you might be one of those determined to pay it all off in 2017. One way to effectively do that is by consolidating your credit card debt.
What Is Credit Card Consolidation? Debt consolidation is about taking several different loans and combining them into one. There are a number of reasons why you might want to do this, but there are usually a couple of major goals behind consolidation.
First, consolidating your credit cards reduces several payments throughout the month to just one. That simplifies your bills and lowers the chance of forgetting one, resulting in a missed payment. Plus, your credit card interest rates are probably high. It’s common to pay between 17% APR and 22% APR on your credit cards. That’s a large chunk of your payment going toward interest each month instead of paying down the principal. Consolidation can help you roll high-interest credit card debt into one low-interest loan.
But there are several ways to consolidate credit card debt and not all will be the right option for you. Before you apply, here’s what you need to know about credit card consolidation.
Credit Card Balance Transfer
One of the most popular ways to consolidate credit card debt is to use a balance transfer. At the beginning of the year, you might start getting offers from credit card companies for an introductory rate of 0% APR when you move a balance from one credit card to another.
Usually, these balance transfer offers allow you to pay no interest on the balance for 12 to 24 months. During this time, you can put 100% of your payments toward the principal. If you have several smaller balances, transferring them to a new card at 0% APR can be a simple way to pay that debt down quickly.
Before you transfer, though, know that you will likely pay a balance transfer fee. Some credit cards waive the fee as part of a promotion, but there is a good chance you will be stuck with a fee. Even so, the interest savings might be large enough to make up for it.
Of course, this is only a good strategy if you pay off the full balance before the promo period expires. Make plan to pay off a large chunk of the balance each month before you have to start paying interest again.
Consolidate Debt With a Personal Loan
Another smart option is to consolidate credit card debt with a personal loan. You won’t get 0% APR, but you might get a fixed interest rate that is much lower than what you’re paying on your credit cards now.
Additionally, many credit cards have variable rates. With the Federal Reserve’s recent rate hike, and expectations for another in 2017, your debt could become even more expensive. A fixed rate personal loan locks you into a lower rate for the life of the loan.
Each lender is different, but generally, you can borrow anywhere from $5,000 to $50,000 with a repayment term of three to seven years. Keep in mind that you’ll need to have decent credit in most cases, as well as proof of steady income.
Home Equity: Think Twice
It can be tempting to use your home equity to consolidate credit card debt, but it’s usually not the best choice. Yes, you can usually get a much lower interest rate, and in some cases, the interest you pay is tax-deductible.
However, don’t forget that you are taking unsecured credit card debt and turning it into debt secured by your biggest asset: your house. If you end up unable to make payments on the home equity loan or line of credit, you run the risk of losing your home. Carefully weigh the pros and cons before you make the move to use your home’s equity to consolidate credit card debt in the new year.
Remember to Look at Your Spending
None of these methods matter if you haven’t changed your spending habits. It only works to consolidate credit card debt if you are no longer spending more than you earn. Debt is usually a symptom of other financial issues. Take a look at the way you spend your money. Do your expenses amount to more than your income? Where can you cut back on your spending?
It’s important to be honest as you look at your habits. Before you make any move to consolidate credit card debt, make a plan to reform your spending. That way, you can spend this year paying off your debt and remain debt-free for years to come.