6 Easy Ways to Consolidate Credit Card Debt

If you’re scrambling to pay your credit card bills each month, and juggling payments is becoming increasingly difficult, you’re not alone. According to a 2015 report by the Consumer Financial Protection Bureau, credit card balances in the U.S. are currently more than $925 billion.

Credit Card Balance in U.S (Source)

Combining your credit card payments into one monthly payment can make the payoff process more manageable. Learn how to consolidate credit card debt with these 6 proven methods.

What is credit card debt consolidation?

Credit card debt consolidation allows you to combine your credit card debt into one new monthly payment. Consolidating credit card debt makes it easier to pay off balances. You no longer need to make several different payments each month. If the new interest rate is lower than that of your former credit cards, consolidating can also result in a lower monthly payment.

A lower monthly payment amount can free up money in your budget, so you can pay off the balance faster and reduce financial stress.

Credit card debt consolidation options

There are various options for consolidating crediting card debt. Each option has its benefits and drawbacks.

1. Low interest/no interest credit card balance transfer

If you can qualify for another credit card, you may be able to use it to consolidate your credit card balances. There are fees associated with transferring credit card balances.

This option works best if:

  • You have a good credit score. (670+)
  • You have a stable, healthy income.
  • You have a low debt to income ratio. (43% or less) And you owe less than $10,000 in credit card debt.
  • The balance transfer credit limit is high enough to allow you to pay off the entire amount you owe on credit cards.
  • The new card’s interest rate is lower than the average rate of the cards you wish to pay off. (This will save you money each month and offset the balance transfer costs.)
  • You have altered your spending habits and will not use the cards that you pay off. (If you worry that you may use the cards, it is best to cancel them. Doing this is likely to lower your credit score.)

Effect of low interest/no interest credit card balance transfer on your credit score: Neutral or positive.

2. Debt settlement

A debt settlement company negotiates with your creditors. The negotiated lump sum you end up owing is generally less than what you originally owed.

To pay off the determined settlement, you save a certain amount of money in an escrow-like account managed by the debt settlement company. This savings process usually takes 24 to 36 months. Once the account has enough funds, they are used to make the lump sum payments to the credit card companies.

While you deposit money into the debt settlement account, you make no payments to your creditors. This usually negatively impacts your credit score.

This option works best if:

  • Your income isn’t enough to cover your current required minimum balance payments, and you are behind in making payments. (A debt settlement company won’t reduce what you owe if they think you’re able to pay.)
  • Your credit is already damaged, and you’re willing to withstand more negative impact. (If you’ve managed to keep your credit from damage yet, this may not be a good option.)
  • You owe more than $10,000 in credit card debt.

Effect of debt settlement on your credit score: Generally negative.

3. Credit counseling

Credit counseling companies are usually non-profit organizations that provide advice about debt and money management. After reviewing your financial situation, credit counselors help develop a personalized plan to tackle your credit card debt. Many credit counseling companies also offer debt settlement plans.

When exploring this option, keep in mind that reputable credit counseling companies are generally certified and accredited by the National Foundation for Credit Counseling.

This option works best if:

  • You feel overwhelmed by the various options for debt consolidation and want some guidance.
  • You are ready, willing and able to follow a credit counselor’s advice about your debt management.
  • You owe more than $10,000 in credit card debt.
  • Your income isn’t enough to cover your current required minimum balance payments, and you are behind in making payments.
  • Your credit is already damaged, and you’re willing to withstand more negative impact.

Effect of credit counseling on your credit score: Generally negative.

4. Chapter 13 bankruptcy

If your credit card debt has become insurmountable, consider filing Chapter 13 bankruptcy. This allows you to propose a repayment plan to your creditors. With this type of bankruptcy, some of your credit card debt may be forgiven.

Generally, you must pay your credit card debt over the next three to five years.

This option works best if:

  • You owe more than half your gross income and show payment hardship.
  • You won’t be able to pay off the credit card debt within five years.
  • You’re willing to risk  having a bankruptcy on your credit report. According to FICO, a bankruptcy is a “very negative event” for your credit score. A Chapter 13 bankruptcy will remain on your credit report for up to seven years.

Effect of Chapter 13 bankruptcy on your credit score: Negative.

5. Personal loan

It may be advisable to pay off your credit card debt with a personal loan. Such loans generally feature a fixed interest rate and a specified repayment term. You use the loan funds to pay off your credit cards and then make one monthly loan payment.

This option works best if:

  • You have a good credit score (670+)
  • You have a stable, healthy income.
  • You have a low debt to income ratio. (43% or less)
  • The loan interest rate is lower than the average interest rate of the cards you wish to pay off.
  • You owe less than $10,000 in credit card debt.

Effect of personal loan on your credit score: Neutral or positive.

6. Home equity line of credit (HELOC)

If you own a home and have built up some equity, a HELOC may be an ideal solution for paying off credit card debt. Such credit lines allow you to draw money from the equity you’ve built in your home. HELOCs usually charge a variable interest rate.

This option works best if:

  • The interest rate you’ll pay is lower than the average interest rate of the credit cards you’re paying off.
  • You’re able to get a credit line that is enough to pay off your credit cards.
  • You have a good credit score (670+), and your credit report reflects that you pay your bills on time.
  • You plan to stop using credit cards and put the money toward paying off the credit line.
  • You are aware that a HELOC uses your home as collateral. If you fail to pay, you risk losing your home.

Effect of HELOC on your credit score: Neutral or positive.

Want help determining which credit card debt consolidation option is right for you? Contact SuperMoney’s experts on Debt Help.

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