One of the most common ways to consolidate your credit card debt is to contact your local bank or credit union and request a debt consolidation loan. The application process can often be completed over the phone or online. What’s great about these loans is that they often offer flexible terms, with some ranging from 1 to 7 year terms, and set consistent month-to-month repayment maturities, which aids in budgeting. As a bonus, some financial institutions will make payments directly to creditors, saving you the hassle.
Realize that your interest rate is most likely determined by the term of the loan and your credit score. Loans may also incur an origination fee, which adds to the overall cost of the loan.
Often the big four metrics used in loans are income, credit score, total assets, and total debt. Some underwriters add some non-traditional metrics to their loan approval process. During the underwriting process, metrics such as education level, length of stay in current residence, and even employment history can generate approvals that banks may not have. This is especially useful for new borrowers who may not have a strong credit profile.
There are some downsides, such as potential origination fees and fewer loan terms to choose from. Rates are comparable for those with good credit scores but can be much higher if your credit score is on the lower end.
Debt Consolidation Program
A debt consolidation program is usually a service for borrowers where your credit cards are combined into one payment. From there, you usually make one payment to the program which then forwards the payment to your creditor. Not to be confused with a debt consolidation loan, where a loan is provided to pay off your existing debt. Your existing debt is still there but may be easier to manage.
Ideally, your plan’s monthly payments will be smaller per month than making all payments individually. It also means that more of the payments go toward paying down your existing debts. Debt consolidation programs work with your creditors to help reduce interest rates on debt and eliminate various fees such as late fees, even if none of these are promised. Some debt consolidation programs may require closing some or all of the cards you are consolidating, so be sure to double check to see if your goal is to keep your cards.
If you are looking for help with debt servicing challenges that are impacting your credit, you can contact an accredited nonprofit credit counselor.
Balance Transfer Credit Card With 0% Interest.
Many credit cards offer an introductory offer of 0% APR on balance transfers for a limited time upon opening the card. While they may still incur a balance transfer fee (usually 3% to 5% of consolidated balances), they often offer a 0% introductory period, usually six months to a year. During that time, you won’t have to worry about your balance accruing additional interest.
The MBNA True Line Mastercard for example, is an excellent choice for those considering going this route. It comes with a respectable $0 annual fee and 0% intro APR for 12 months on qualifying balance transfers made within the first nine months. It also has a low regular APR of 12.99%.
The downside of a balance transfer credit card is that the credit limit is given and it is limited to only the intro period before interest starts to accrue. For some people, spreading out payments over a longer period of time may be more beneficial, even if it requires paying some interest.
Second Mortgage or HELOC
If your home’s value has increased over time or the balance has been paid off at a reasonable amount, using your home can be a way to consolidate your debt. Taking out a second mortgage or using a home equity line of credit (HELOC) effectively uses your home as collateral to pay off other debts.
Because there are underlying assets to these loans, the rates are often lower than what you would get with a personal loan, making monthly payments smaller or avoiding higher interest rates with other methods. Lower interest rates can give you the ability to pay off balances more quickly. There may be additional mortgage-related fees when taking this route, so direct inquiries to your lender are a must. There may be tax implications as well.