Carrying large amounts of debt on credit cards can be stressful. Credit cards often have high interest rates, which means you can pay a lot of money in interest when you can't pay off the balances quickly. People struggling with credit card debt often have...
- Multiple credit cards with balances
- Trouble making payments on time
- Trouble paying down the balances
If this sounds like you, you may want to consider credit card debt consolidation. When people consolidate their debts, they take out a new loan that allows them to pay off other debts. This lets them "consolidate" their bills and make one payment to one lender.
Another advantage of debt consolidation is that it may save money on interest payments. This is especially true when people consolidate credit card debt because the interest rate on credit cards is often much higher than other loans.
Make sure you understand the upsides and downsides of a debt consolidation loan as well as the costs and fees before you sign any papers. And get professional advice when you need it.
How to start paying off credit card debt
Before you look at loan options to pay off credit card debt, there are a couple of things it makes sense to do first.
- Check your credit report.
Review your report to make sure there are no errors. (You can get a free copy of your report at www.annualcreditreport.com.) Your credit report determines your credit score. Lenders will use your credit score to help them decide if you qualify for a loan. The higher your score, the better.
- Figure out how much you can pay.
You don't want to replace one set of debts you have trouble paying with a new loan you will have trouble paying. Figure out how much you can realistically afford each month.
- Make a budget and stick to it.
One important step to managing debt is not taking on more new debt. Creating a budget can help. And if your budget leaves you with more money at the end of the month, use that money to start paying down your credit card balances right now.
Credit card debt consolidation options
When you need a debt consolidation loan to help you get a handle on your finances, you have many choices. These include balance transfer credit loans, personal loans, HELOCs, home equity loans, and cash out refinances.
Balance transfer credit card
Some companies may allow you to transfer your old credit card balances to a new credit card and pay a lower interest rate. However, these offers may require a transfer fee and the lower interest rate usually lasts for a limited time. Once this time is over, the interest rate can increase by a lot. Look carefully at the fine print before you sign up.
You can get a personal loan from your bank or credit union. These loans do not need collateral, have a fixed interest rate, and are typically short term. If your credit score has suffered because of credit card debt, you may have trouble securing a personal loan.
Home equity line of credit (or "HELOC")
A HELOC is a line of credit that uses your home's equity as collateral. You don't get a fixed sum of money from these loans. The lender makes a pool of money available to you, up to a certain amount, and you draw on this money as you need it. The interest rate on HELOCs is adjustable, which means your monthly payments may go up over time.
Home Equity Loan
These loans also use your house's equity as collateral. What makes a home equity loan different from a HELOC is that you get the full loan amount as a lump-sum payment. Home equity loans also have a fixed rate, which means the amount you need to pay each month won't change.
Cash out refinancing
A cash out refinance lets you replace your current mortgage with a new mortgage for a larger amount of money. You get the difference between these two loan amounts as cash you can use to pay off credit card debts.
To qualify for a cash out refinance, you need a certain amount of home equity to use as collateral. A cash out refinance is a new mortgage. This means you will have to apply for a new loan and probably pay new fees and closing costs. Cash out refinances increase the amount you owe on your mortgage and may extend the number of years you are paying it. As a result, you will probably pay more total money in interest on your new mortgage than you would pay on your current one.
One big advantage of a cash out refinance is that the interest rate on a mortgage is usually much lower than the interest rate on most credit cards. This means a refinance can make sense even with the additional costs and interest payments. Consult your financial professional and run the numbers before you make a decision.
Two ways to learn more about your choices
To read more about home equity loans, see our Insights on HELOCS, home loans, and cash out refinances. We explore the pros and cons of each of these options.
If you would like to request a call from a Freedom Mortgage Loan Advisor, visit our Get Started page.