Consolidate Credit

10 Ways to Consolidate Credit Card Debt

Readers often ask Bill, the Bills.com advice columnist, how to consolidate their credit card debt. Here is a summary of Bill’s top 10 suggestions for you to consolidate credit card debt.

1. Apply for a Home Equity Loan

A home equity loan is money you borrow that is secured by your ownership stake in your home. Home equity loans are similar, in some ways, to standard primary mortgage loans. Both have fixed principal amounts disbursed when the loan closes, pre-set payment schedules, and either adjustable or fixed interest rates. Home equity loans also share similarities with Home Equity Lines of Credit (HELOCs).

2. Consider a Cash-Out Refinance

In a cash-out mortgage refinance, the home’s value is estimated by an appraiser. The house’s value is compared to the balance on the home loan. Any equity available can be borrowed against by the homeowner. If the homeowner refinances for amount larger than the balance of the mortgage, this is called a cash-out refinance.

3. Open a Line of Credit

A line of credit is a form of revolving credit where the borrower is approved for a specific amount of credit. Banks and credit unions typically offer consumers lines of credit secured by a home. They may also offer an unsecured line of credit to high net-worth customers with perfect credit history.

4. Transfer to a Card with 0% Interest Balance Transfer

0% balance transfer offers are available only on certain credit cards, and only well-qualified people are offered these cards. However, if you qualify, the 0% rate is for a limited period of time. If you do not pay off the debt you transferred onto the new card within the promotional period, the creditor will begin charging interest on the remaining balance.

5. Apply for a Personal Loan

Personal loans have fixed monthly payments and must be paid-off in-full within a set amount of time (typically over 36 or 60 months). You can find personal loans at your local bank, credit union, Prosper or Lending Club.

6. Get a 401(k) Loan

A 401(k) loan, if allowed by the rules of your 401(k) plan, is a withdrawal from your account that you repay with a modest interest rate. The interest paid goes to your account. You pay yourself the interest. There is no tax consequence for a 401(k) loan that is repaid. The risk of a 401(K) loan is the costs involved if something prevents you person from repaying the loan as agreed.

7. Borrow From a Rich Family Member

It probably will save interest charges, but personal loans create the potential for damaged personal relationships, the expectation that you’ll return the favor years down the road, and even legal action by someone who was previously a good friend or close family member. If you are asked to lend money to a relative, consider instead gifting the person the money.

8. Consult With a Credit Counselor

Consumer Credit Counseling Service (CCCS) companies help people with financial counseling, budget planning, and Debt Management Plans (DMPs). In a DMP, the CCCS arranges a new payment amount with each of your creditors that is based on a lower interest rate. You then make a monthly payment to the CCCS, which distributes the funds to creditors. CCCS has negatives, though. First, depending on your creditors, the CCCS may not be able to reduce monthly payments enough to improve your financial situation. Second, it may have a negative impact on your ability to obtain a loan, so you may not wish to enter into a DMP if you anticipate any large purchases, such as home or an auto, soon. Third, the average DMP takes 5 years to complete, so you must be able to commit to a long-term repayment plan.

9. Hire a Debt Settlement Company

Debt settlement companies also offer credit consolidation services. Rather than making monthly payments to your creditors, these programs negotiate lump-sum settlements with creditors, often reducing debts substantially. Debt settlement programs usually take 3 to 4 years to complete, so this is a good option for many people to rid themselves of debt in a speedy manner. In many cases, they set up a low monthly program payment. However you make special savings deposits in lieu of minimum monthly payments. You are not making payments to creditors, which has negative consequences. First, debt settlement programs, will significantly damage your credit score while in the program. You will also be exposed to your creditor's collection efforts, including letters calls and possible lawsuits. However, if you are unable to afford to pay your creditors, the hit to your credit and the negatives may be worth the benefit of ridding yourself of credit card debt.

10. Create a Budget and Change Your Spending Habits

One of the first steps toward financial freedom is to understand how much money comes in and goes out of your household every month, what is called your "cash flow." Your cash flow is a factor of how much comes in as income and how much goes out as expenses. Hopefully, you have much more coming in than is going out… and if you don’t you may need to make some quick changes. Start by creating a budget that breaks down your income and expenses by financial categories, providing you with a snapshot of your entire cash flow picture.

Conclusion

As you can see, you have many options to consolidate your credit card debt. Which you choose depends on your goals, circumstances, and the amount of your debt.