Credit card debt has the tendency to snowball out of control when we aren’t paying attention. If you set up automatic recurring payments or use your credit card to pay for insurance, it’s easy to pile up the debt.
Credit card debt does not discriminate; it can become a problem for a person of any age, race, gender, or orientation.
But how can you get out from what feels like a bottomless pit? Let’s explore some options that may be beneficial to getting your credit card debts under control.
Credit Card Consolidation Option #1: Credit Counseling
Credit counseling companies are a popular option for people trying to get out of credit card debt. These companies make it possible for people to get out of debt over a specific period of time. The results are not instant and take time to accomplish.
A consumer credit counseling agency is a non-profit organization. They provide money management advice and help with personal debts. Their target audience is people who are struggling with their finances.
In addition to helping those struggling with debt, consumer counseling agencies also:
- Improve financial literacy
- Teach skills to budget as well as save money
- Offer self-education of debt relief options
- Provide help with debt such as medical and other unsecured debts
- Offers Counseling on student loans
- Provide Bankruptcy counseling
- Help you achieve your goals
In most cases, the skills learned from a credit counselor will help you come up with a debt management plan.
Credit Card Consolidation Option #2: Personal Loan
Admittedly, the most popular option for eliminating credit card debt is to take out a personal loan. Taking out a personal loan can be beneficial IF it is done correctly.
Before we completely rule out the option of a personal loan, let’s identify the pros and cons.
Pros of a Personal Loan
- For the most part, personal loans have lower interest rates. A lot of credit cards that rope us in often tend to have high-interest rates, especially for younger customers. The lower the interest rate means the less repayment overall.
- A personal loan has a set payment schedule. You will know exactly when you will be debt-free. Credit cards have the appeal of minimum payments which means you end up paying on it longer than necessary.
- A personal loan has the potential to boost your credit score. When you don’t make your credit card payments, it negatively impacts your on-time payment history. This is an important part of your credit score. When taking out a personal loan, you pay off those credit cards, lowering your utilization. This only applies if you don’t max out the credit card again.
Cons of a Personal Loan
- You may find that there are more fees with a personal loan than with your credit cards. Personal loan fees often include application fees, origination fees, and possible prepayment fees.
- For those with lower credit scores, personal loans are typically secured. Secured personal loans rely on personal assets used as collateral. If you do not pay the loan, as agreed, you stand the risk of losing other personal belongings.
- You could end up deeper in debt. The open credit lines are often tempting, and if they are used alongside the personal loan, you will often find that you have almost doubled your debt.
Make sure you look into all of your personal loan options before signing on the dotted line.
Credit Card Consolidation Option #3: Balance Transfer Credit Card
What is a balance transfer credit card, you ask? You often hear “balance transfers” on commercials for credit card companies, but never bat an eyelash, right? These balance transfers may be what get you out of credit card debt once and for all.
Credit card companies often run specials on balance transfers. This is because they want your business, and if they have to cover your other credit cards, they will. A lot of introductory balance transfer offers are as low as zero percent. Think of it as a consolidation loan through a credit card company.
If you think that utilizing a balance transfer is the right option for you, make sure you read the fine print. Some companies charge up to five percent of the balance for the transfer. There is a possibility to find transfer companies that don’t charge a fee, but you might have to really dig to find them.
Here are some important things to think about:
- If you do not CLOSE all of the cards that you just transferred, your credit utilization may fall with the additional balance added
- New credit lines will cause a temporary dip in your credit score. You can expect it to fix itself in three to six months
- Temptation is strong when you have another line of credit. Don’t allow yourself to fall victim to using the extra credit for spending.
Credit Card Consolidation Option #4: Cash-Out Auto Refinance
An option that you may have available to you is a cash-out auto refinance. This option means that you would refinance your car to try to get enough cash from the loan to pay off the credit card debt you have.
Essentially it is like having a personal loan and using your car as collateral.
Using your car as collateral on a loan only works if your car has enough equity. Equity is the car’s value versus the loan balance. You need to have enough equity available to cash-out for your credit cards.
Your credit score and car value will influence a lender issuing the loan.
Is it worth it? You have to be the judge of this. If the payment is something that you can afford monthly, as long as you close the cards that you are paying off, it may be beneficial.
You are increasing your overall debt by doing this, but the potential to pay it off quicker and at a lower interest rate is higher.
Credit Card Consolidation Option #5: Home Equity Line of Credit and Retirement Account Loan/Cashout
A home equity line of credit works a lot like refinancing your car. The value of your home has to exceed the amount of the loan by at least what you are trying to borrow. Just like any loan, it has its ups and downs.
Don’t be enticed by the lower interest rate that a mortgage generally offers its borrowers. Just because it is a lower interest rate doesn’t mean that it will still fit your monthly budget. If you can’t make these payments, it is your home on the line.
Depending on the amount you have paid into your retirement account, you may be able to borrow against it. Borrowing against it means that you will get the amount issued as a loan, and you will pay it back weekly, biweekly, or monthly.
If you choose to take a cashout option instead of a loan, the penalties can often be greater than the credit card balances on their own. When you file taxes, you will be assessed an early withdrawal tax on a retirement account.
Credit Card Consolidation Conclusion
At the end of the day, the option you choose for your credit card debt consolidation is yours to make. No one can tell you what the best option is. Your specific circumstances may not be conducive for a personal loan, but a balance transfer may fit your needs perfectly.
You have to be able to make the payments with whatever option you choose. So make sure it is one that fits within your budget. If all else fails, you can always try negotiating with your credit card companies. You can utilize your public speaking and negotiation strategies.
Sometimes, these companies will give you a lower interest rate if you ask. After all, the worst they can say is no.