Editor's Note: This article is the second in a two-part series containing consumer tips regarding credit card consolidation. Please click here to read the first article in this series.
Now let’s take a look at some of the options for consolidating. When it comes to consolidating your credit card debt you have several options at your disposal, each with its own set of pros and cons. Here’s a brief description of some popular options along with their relative pros and cons.
Low-Rate Credit Cards
If your credit rating is good enough to qualify for a low-rate credit card, possibly even a zero percent introductory rate, transferring all your higher rate credit card balances could be a good option. This option generally works best if you can pay the balance off within one year. Check out our Card Reports section to evaluate different low-rate credit card offers.
- If you qualify for a low-introductory rate card you may get the benefit of not paying any interest for a time.
- Excessive transfer and new account activity on your credit history could cause you to have a poor credit score. This is bad when your low-rate credit card expires and you aren't able to qualify for a new card. You could be stuck with a high interest rate.
- Watch out for balance transfer fees. Fees could potentially outweigh any interest savings that you might realize.
Home Equity Loan or Home Equity Line of Credit
Because you’re using your home as collateral for this type of debt, it’s imperative that you really understand your repayment plan and deal with the issues that got you into debt in the first place. Detweiler suggests this is not a good option in a hardship or crisis situation, including a job loss, since failure to pay back a home equity loan could result in the loss of your home.
- Usually a lower interest rate.
- Interest is normally tax deductible.
- Your monthly payment will usually be lower so you can use the difference between it and your fixed monthly debt payment to start building an emergency fund.
- You will be trading unsecured debt for secured debt putting your home at risk. If you miss even one payment you could lose your home, whereas if you left it as credit card debt you would still have a place to live.
- You could end up paying a lot of money in fees such as closing costs and appraisal fees. Make sure you shop around to find the best deal.
- The entire loan must be repaid before you can sell your house.
Because of the potential effects of high credit card debt on your credit rating it may be difficult to qualify for an unsecured personal loan with a decent interest rate. If your credit rating is good you may qualify for a rate in the low-teens, but if it’s poor you may end up paying around 20 percent. Shop around at a variety of financial institutions including credit unions to compare the cost of fees and interest. And be aware that generally the extra products they try to sell aren’t worth the cost you’ll pay.
- Can get good rates, especially if you are a member of a credit union and have good credit.
- Unsecured so you don’t have to worry about losing your home.
- Your credit rating could drop further because of credit inquiries, closing old accounts, and opening new accounts.
- Additional fees.
Now you’ve got some tools under your belt to help dig your way out of credit card debt. You can also browse our Articles Section for more information about credit cards and debt. Good luck in your quest to be debt free!
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