Debt consolidation may prove to be a handy option when the debt burden has been getting the better of you. Suppose you are struggling to repay your current debt because of a high-interest rate. In that case, debt consolidation is a great tactic to lower the interest rate. So, we’ve a breakdown 5 ways of How to Consolidate Your Credit Card Debt.
Similarly, consolidating your debt from multiple accounts to one credit card or loan means you will have to manage only one account from now on. In this way, debt consolidation helps you get out of a financial crisis by providing you with a better repayment policy.
5 Ways of How to Consolidate Your Credit Card Debt
There are many ways to consolidate your credit card debt. We have found these five debt consolidation plans more effective and credible than other consolidation strategies.
1) Use a Balance Transfer Credit Card
Many banks offer balance transfer credit cards and allow you to transfer your debt from all other accounts to one account. Usually, lenders introduce such credit cards to attract new customers. Therefore, bank transfer credit cards come with a very low or even no interest rate for a promotional period.
Remember, you can only apply for a balance transfer credit card if your credit score is good enough to meet the qualification criteria. You may also need to pay a nominal balance transfer fee upfront. Similarly, the card issuer will charge the interest at a relatively higher rate once the promotional period will have ended.
Therefore, you should count all these factors before applying for a balance transfer credit card, ensuring that getting a balance transfer credit card will make your debt repayment easier and not make it more difficult for you.
2) Apply for a Personal Loan
Personal loans come with a fixed interest rate instead of a complex variable annual percentage rate. You can apply for a personal loan, even if your credit score is not very good.
A personal loan may be a more practical option to consolidate debt when you have an enormous obligation and cannot get a balance transfer credit card.
Many lenders, such as banks, credit unions, and online lenders, offer personal loans. Credit unions usually provide the most reasonable interest rates. These unions are not-for-profit organizations and exist to serve their members. Though, every lender charges a nominal origination fee for a personal loan.
3) Apply for a Secured Loan
Personal loans are also classified as unsecured loans because you do not risk an asset to get them. You may have to pay a relatively higher interest rate with a personal loan if your credit score is not good enough.
A secured loan may be a better choice to consolidate debt instead of an unsecured personal loan in such a situation. Lenders offer a comparatively lower interest rate with secured loans, as some collateral provides them with the surety of repayment.
The collateral could be your home, car, or any other asset. However, choose this option carefully because the lender can seize your assets if you default on the loan payment.
4) Apply for a 401(K) Loan
Your company-sponsored retirement savings account can also be an excellent option to consolidate your credit card debt. You can borrow money from your retirement account with a 401(k) loan and use this money to pay off your other debts.
Although your company will charge interest on the 401(k) loan repayment, ultimately, all the money will get back to your account. Another advantage of a 401(k) loan is that it does not show up on your credit report.
You may reduce your retirement fund massively with a 401(k) loan and miss your company’s potential growth. Likewise, you will have to pay some hefty penalties and fees if you leave your current job before paying off your 401(k) loan.
5) Consult a Credit Counselling Agency
Suppose you are finding it difficult to consolidate your credit card debt at your favourable terms. In that case, you should consult a credit counselling agency. These agencies analyse your financial situation professionally and devise a debt management plan to pay off your debt.
A credit counsellor makes sure that you avail the most favourable option to consolidate your credit card debt. With a debt management plan, you choose to make one monthly payment to your agency, and it will repay your debt at the lowest possible interest rate on your behalf.
Besides the monthly debt instalment, a credit agency usually charges a small monthly fee for its credit counselling service. Choose the credit counselling agency wisely to get an optimal and effective debt management plan.
How Does Debt Consolidation Affect Your Credit Score?
Remember, applying for a consolidation loan may cause a sudden dip in your credit score. However, suppose you plan to consolidate your credit card debt. In that case, it indicates that you are already struggling to repay your current debt.
This implies that your credit score is going to decrease one way or another. However, choose to consolidate your credit card debt to pay off your existing loans. You will see an improvement in your credit score later on.