How can I safely consolidate my credit card debt?
Answer: Consolidating credit card debt depends on your situation. If you are thinking about debt consolidation, you might want to first consult a non-profit credit counselor.
Consolidation means that your various debts, whether they are credit card bills or loan payments, are rolled into one monthly payment. If you have multiple credit card accounts or loans, consolidation may be a way to simplify or lower payments.
If you are thinking about debt consolidation, you might want to first consult a non-profit credit counselor. Many people get into debt because they can’t afford to make monthly debt payments on top of paying for daily living expenses. If you’re not sure of the best way to address your debt, a credit counselor can help you explore your options.
You can also reach out to your individual creditors to see if they will agree to lower your payments. Some creditors might be willing to accept lower minimum monthly payments or change your monthly due date because they would rather get paid less on a regular basis – than not get paid at all.
Here’s what you need to know if you are considering these options for consolidation:
Transferring different debt balances to one credit card account
Many credit card companies offer zero-percent or low-interest balance transfers to allow you to consolidate your debt on one account. This will allow you to make one payment and sometimes will result in lower payments.
Warning: Many zero-percent or low-interest credit card offers only last for a limited amount of time. After that, the interest rate on your new credit card may rise, increasing your payment amount. Also, with many of these cards, if you’re late on a payment the credit card company can increase your interest rate. Many zero-percent or low-interest balance transfers are subject to a fee (sometimes called a “balance transfer fee”) The fee is usually a certain percentage of the amount you transfer. In addition, if you use the same credit card to make purchases after you take advantage of the balance transfer offer, you will be charged additional interest on those purchases.
Make sure you understand exactly when the low-rate on your balance transfer will end. Also, understand whether there are any other fees or costs that can increase your payment amount, like a balance transfer fee or additional interest charges on new purchases made with the card. If you want to avoid interest on purchases after you make a balance transfer, you should plan to use a different card for those purchases.
Taking out a debt consolidation loan
Many banks, credit unions, and installment loan lenders offer these loans which collect all of your debts into one loan payment. This simplifies how many payments you have to make to different creditors. These offers also may include lower interest rates than you are currently paying. However, if you consolidate your debts and then incur new debts on top of the consolidation loan, you may end up farther in debt than before.
Many of the low interest rates for debt consolidation loans may be “teaser rates” that only last for a certain period of time. After that, your lender may increase the rate you have to pay. They may also include hidden fees or costs that you would not have to pay if you continued making your other payments. Also, because you have debt, you might not be able to get the best interest rates that these companies offer.
Before taking out one of these loans, add up all of your current payments. Make sure you include all of the fees and interest you pay now. Compare these payments with what you would pay if you took out the consolidation loan and make sure it’s a better deal.
Taking out a home equity loan
Using a home equity loan to consolidate credit card debt is risky. Although you may be able to get credit at lower interest if you take out a loan against the equity (wealth) of your home, doing so decreases the net worth of your home and could put your home at risk.
A home equity loan could create more debt. If you get into trouble paying it back, you could lose your home if you default on your loan.
Make sure you understand how much you can afford before you take out a home equity loan. Just because a bank may offer you a certain loan amount doesn’t mean you should take the whole amount they offer.
Ask your credit card company about a debt repayment plan. If you get one of these plans, your credit card company might wave late payment or over-the-limit fees or reduce your interest rate to help you pay back your debt.
Things to consider
If you want to consolidate your debt, there are a few things you should think about:
- Taking on more debt to pay off debt may just be kicking the can down the road. Most people don’t succeed in paying off their debt by taking on more debt.
- The loans you take out to consolidate your debt may end up costing you more in costs, fees, and rising interest rates than if you had just paid your previous debt payments.
- If problems with debt have affected your credit score, you probably won’t be able to get the low interest rates on a balance transfer that would make consolidation worth it.
- A non-profit credit counselor can help you weigh your options.
If you have a problem with a credit card, you can submit a complaint with the CFPB online or by calling (800) 411-CFPB (2372).