4 Ways to Consolidate Credit Card Debt
When credit card debt gets away from you, stress and confusion often follow. Rather than keeping track of different debts, a common method to address the issue is to consolidate debt into one single entity.
By paying off all of this at once, things can be made much easier, and we want to look at four methods to accomplish this goal.
1. Credit card consolidation loan
Our first method of addressing credit card debt comes through the creation of a credit card consolidation loan. These are a form of personal loan which comes with the major advantages of fixed interest and monthly payment amounts.
This means no nasty surprises and no additional stress. These forms of loan are typically offered by credit unions, non-profit entities which exist in a far more helpful and less predatory space than many others in the financial industry.
Another benefit of this type of debt consolidation loan is that it is possible to get a lower APR than many alternative methods. This largely depends on your credit rating, however. Those with poor credit will likely find it much harder or impossible to qualify for lower-level rates.
That said, with a federal credit union, the highest possible APR is still a relatively low 18%.
To simplify, credit card consolidation loans can be much simpler than the alternatives, and often come with lower repayment rates than the other opportunities if you have good credit.
2. Home equity loan
As the name suggests, a home equity loan is one that borrows against the worth of your home. Because of this, it is only available for homeowners, and only after a home is appraised to have a requisite amount of value.
Home equity loans come in the form of lump sums with fixed interest rates, which commonly incur a draw period. During this time, which usually lasts around ten years, you'll be required to make payments just for your interest first, rather than to the underlying amount owed.
You can still make payments over this amount into your total debt, but interest will always come first in this agreed period.
The biggest advantages of this type of personal loan arise from how it can often come with lower interest rates than alternatives, and how it can still be gained in many cases if you have low credit. Finally, its long repayment times can make repayment amounts lower than other options.
The downside is that, since it is secured with your home, the ultimate failure to pay can result in your home being sold off to pay back your debt.
3. 401(k) loan
A 401(k) loan is only possible for those who have active retirement 401(k) accounts. These have some of the shorter repayment times of the four methods, with the usual upper limit of five years. While this can be a powerful option, it can also be very harmful down the line if repayments aren’t made, so keep that in mind.
In essence, taking this loan is borrowing straight from the savings that you have in a 401(k) account. The stipulations include the amount being limited to a maximum of 50% of your total 401(k) account, or $10,000, whichever is higher. No matter how much you have, you can never withdraw over $50,000.
The advantages of this type of loan are that it has no impact on your credit score and that it has lower interest rates when compared to unsecured loans. A potential issue here is that, if you quit or lose your job and have no other retirement plan from which to transfer debt, the loan will be due in a mere 60 days. Similarly, the penalties on any non-payments are harsh.
This is definitely not a loan to take lightly, as it borrows directly against your retirement. At least, since these have to be run by a government-registered employer, the odds of being hit by a personal loan scam are nil.
4. Debt management plan
A debt management plan can be applied for from many non-profit credit counseling agencies. This is an option that is often used by those whose bad credit prohibits them from utilizing any other available loan repayment options. To qualify for a debt management plan, you still must be able to prove regular employment, otherwise, lenders will decline involvement.
The best part of these loans is that, when properly managed, they have been known to cut overall interest rates in half. Combined with fixed monthly repayments, these mean that a regular schedule can see major progress when other avenues fail.
A negative aspect of these loans is the short repayment times, which are usually within a three- to five-year range. It means that repayment amounts can be higher than with other methods. In conjunction with start-up and monthly fees, this can make paying back a debt management plan a difficult prospect.