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All About Credit Card Consolidation

Though credit cards can come in handy, using them carries a certain amount of risk. For one, you have to focus on paying each bill in full and on time. With everything else going on in life, keeping track of credit card balances and debt can be stressful. But sometimes you don’t have to juggle multiple credit card debts. You might want to look into credit card consolidation and whether it’s a useful option for you.

Check out the best balance transfer credit cards.

What Is Credit Card Consolidation?

Credit card consolidation is the process of combining existing debts into a singular new debt. It’s an opportunity to get yourself out of a bad credit situation. The goal of consolidation is to become debt-free in a quick and cost-effective way.

If you have multiple credit card debts, consolidation merges those debts into one account. That way, you only make one payment per month to one creditor, instead of various payments to too many creditors. This will lessen the stress of having to track the payments of different cards. Plus, credit card consolidation lands you with one interest rate to pay attention to, instead of various interest rates for each card. If you play your cards right, this can make paying down your debts cheaper in the long run.

Credit Card Consolidation With a Balance Transfer Card

You can consolidate your credit card debt either with a balance transfer card or with a loan. A balance transfer card combines all of your credit card balances onto one new card. Depending on the credit card company, this can come with a fee – usually a percentage of the transfer amount. Like most other credit cards, your credit score will come into play when qualifying for a balance transfer card. So if you have a good credit score, this would be a viable option for you.

Balance transfer cards typically have low introductory interest rates, sometimes even a rate of 0%. However, these low rates only last 12 to 18 months before they increase. You will want to watch for how long the intro period lasts and what the new APR will be. Your best shot at saving money is to pay off your debt within that introductory period. Since none of that money goes towards interest, you can pay it off faster.

Credit Card Consolidation With a Loan

All About Credit Card Consolidation

You can also consolidate credit card debt through a loan. With this method, all your debts are collected together into one single loan payment. You have a few different kinds of loans to choose from, like personal loans, home equity loans or 401(k) loans.

You can get a personal loan from a bank, credit union or online lender. The interest rate will depend on your credit score, though personal loans usually have low interest rates. Personal loans come in various size and term lengths. You can find a personal loan that requires repayment within a few weeks, but you can also find loans that last a few years. Getting a personal loan for credit card consolidation can provide you with more concrete steps for paying off your debt due to the loan’s fixed payment period and amount.

Another loan option you can look into are home equity loans. These loans allow you to borrow against your home’s value. You can get a home equity loan if your home is worth more than what you owe. It’s essentially a second mortgage. This option typically carries low interest rates, but will take longer to pay off. It poses a solid option for those with a lower credit score because your home serves as collateral. However, you risk losing your home if you fail to make payments. Taking out a loan against your home equity also lowers the value of your property.

Lastly, you may use 401(k) loans for credit card consolidation, although these are often a last resort option. While a home equity loan borrows against your home value, a 401(k) loan borrows money from your 401(k) account. To get this loan, you must work at a secure job with a retirement account you can borrow from. It typically takes five to seven years to pay off the loan. If you leave your job during that time, you may only have 60 days to pay back the remaining balance.

The biggest risk of a 401(k) loan is that it depletes the money in your retirement fund. You are essentially borrowing against yourself, but you’re doing your future self a disservice. However, 401(k) loans do tend to carry low interest rates. Plus, the loan doesn’t appear on your credit report. In order to make this work, you will have to pay off your loan responsibly or risk taking on heavy fees and even more debt.

Which Kind of Credit Card Consolidation Is Best for You?

Whether credit card consolidation is right for you will depend on a few personal factors. This includes your credit score, payment history and your overall financial situation and reliability. So while you might have the same credit score as your neighbor, getting a balance transfer card may not be the right decision for you both.

When it comes to credit card consolidation, you will want to calculate which options will save you money or pay off your debts more quickly. Being honest in those calculations will be important so you don’t incur more debt with whichever plan you choose. Sometimes credit card consolidation may not even be the right choice. You will have to decide if having one payment and a lower interest rate will save you enough time and money to make it worthwhile.

Balance transfer cards are usually available only to people with great credit. If you qualify for a balance transfer card, you will want to make sure you can pay off your debt sooner rather than later. This is because you will only have about 12 to 18 months of a low interest rate. To avoid owing more money in fees and interest, you’ll want to make your payments within that time window.

Using loans for credit card consolidation means you’re borrowing more money to pay off your debts. You will have to be careful and responsible to borrow only what you need. You will also need to repay that loan responsibly. Otherwise, you might meet consequences like defaulting on accounts and even more debt.

Like balance transfer cards, personal loans typically go to people with good credit. If you don’t have great credit, you can look into your home equity and 401(k) loan options. Again, you have to make sure that you can make payments on those loans. If you miss payments and fall behind, you put your assets at risk. The key is to make payments in a timely manner no matter which option you choose. That way you can pay down debt and improve your credit score.

Pros and Cons of Credit Card Consolidation

All About Credit Card Consolidation

If you choose to consolidate credit card debt, there are a fair amount of benefits and risks. The main benefit comes with consolidating multiple payments into one, more manageable payment. One overall payment can alleviate the stress of keeping up with different due dates and payment amounts. In addition, consolidation should offer a lower interest rate than the multiple credit cards’ rates. This means that less money will go toward interest, allowing you to pay down the balance faster. It becomes one payment with one interest rate every month.

However, lower rates are typically only open to those with good credit. If your credit can’t get you a low rate, you might end up handing over more money due to a higher rate. You could also be met with fees, making consolidation not quite monetarily worthwhile. You also still run the risk of digging yourself deeper into debt if you’re not responsible and careful. Not only that, but you could lose your home or retirement fund if you use a home equity or 401(k) loan.

Because there are so many credit card consolidation options, you may want to look into debt management or consolidation services. Finding the right one can help you get your credit card debt under control. Credit counselors can offer useful advice and help you make a payment plan. These services can negotiate your debt and fees down and make payments on your behalf, acting as the middleman between you and the creditor.

But you will want to do your research before committing to a counselor or debt management program. Be on the lookout for agencies looking to take your money and not make payments. This could end up accumulating debt instead of eliminating it. Make sure to find a transparent company with a variety of payment plan options. You can look into non-profit organizations, as well, just always make sure that the company is registered to do business in the state you’re in.

Bottom Line

When considering credit card consolidation, you’ll want to determine whether it’s the right choice for your financial goals. If your goal is to pay off credit card debt, credit card consolidation could be the way to go. When consolidation is done right, you can see benefits like a better credit score and faster debt payoff. But once you become debt-free, be sure to avoid accumulating another unmanageable amount of credit card debt again. Spending and repaying responsibly will always help you in the long run.

Photo credit: ©iStock.com/stocknroll, ©iStock.com/Ridofranz, ©iStock.com/BraunS

Emily Zhu Emily Zhu writes on a variety of personal finance topics for SmartAsset. Her expertise includes retirement, credit cards, taxes and banking. She grew up in Brooklyn, but now splits her between Brooklyn and Rochester. Emily is currently studying at the University of Rochester.
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