You don’t want to do it, but you brace yourself. It’s time to finally check your credit card balances and assess the damage. Your stomach drops when you see the numbers.
“How did I get into this much credit card debt?” you think. “Is this too much debt to realistically pay back? Will I ever come back from this?”
If you’re swimming in high-interest credit card debt, you might feel anxious or stressed every time you check your account online or get a bill in the mail. You might also feel embarrassed or ashamed that you racked up this much debt. But it’s important to know that you’re not alone.
The latest Consumer Credit release from the Federal Reserve showed that credit card debt in the U.S. has reached a record high of $4.03 trillion, an increase of $197 billion since just 2013. According to Experian, the average American household carries over $6,000 in credit card debt. On top of that, only 45% of households pay their credit card balance in full each month and 27% carry a balance most of the time, according to a 2017 report from the Federal Reserve.
The good news in the midst of these staggering numbers is that it’s possible to quickly and efficiently pay off your credit card debt once and for all through something called debt consolidation.
Credit card debt consolidation involves combining all of your high-interest credit card debt and paying it back in one monthly payment. There are several methods for consolidating credit card debt, each of which has its own benefits and drawbacks.
Read on to figure out the best credit card debt consolidation strategy for you.
Strategy #1: Debt Management Plan
Perfect for: Learning good financial habits
If you’ve always had trouble managing money and you’re looking for a solution that will help you truly get back on your feet, you might want to pursue debt management. This method involves working with a nonprofit credit counseling agency to come up with a debt repayment plan that is simple and streamlined.
Typically, debt management involves a consumer making a single monthly payment to a credit counselor, who will then pay the consumer’s various creditors. As someone pays back their credit card debt with the help of a credit counselor, they get the added benefit of learning about how to incorporate better personal finance habits into their life. Plus, some nonprofit credit counselors will be able to negotiate your balances down to a lower amount.
- You’ll learn about how to develop healthy personal finance habits while paying off your debt.
- It’s fairly easy to find an agency to work with, as there are nonprofit credit counseling agencies across the U.S.
- You’ll likely improve your credit score in the process, as you’ll be making monthly payments to different companies toward your debt. Each payment signals positive credit behavior and improves your score.
- You might be asked to close your credit cards when working with a nonprofit credit counselor, which could impact your credit. (However, closing your credit cards once they’re paid off is not a terrible idea if having open lines of credit is tempting for you.)
Strategy #2: Personal Loan
Perfect for: A simple and streamlined solution
Also referred to as a debt consolidation loan, a personal loan is a type of loan you can take out to pay off your consolidated credit card debt. It’s fairly simple to do, and is ideal for those with excellent credit, as you need a good credit score to qualify for an optimal interest rate. Personal loans can be obtained from most major financial institutions, as well as online lenders.
If you’re juggling various debts across multiple credit cards, a debt consolidation loan might appeal to you, as you’ll only need to make a single payment each month. If you’re considering a debt consolidation loan, just make sure you shop around and consider various loan options in order to secure the lowest rate and best loan terms.
- If your credit is good enough to obtain an interest rate that is better than the interest rates on your credit cards, you could save money.
- A debt consolidation loan is a fairly straightforward, simple solution with only one monthly loan payment in one set amount, instead of five or six payments in different amounts.
- You’ll have a fixed interest rate instead of the variable interest rates applied by different credit cards.
- Debt consolidation loan terms are fairly long, so you’ll likely have a decent amount of time to pay off your credit card debt.
- If you don’t have a good credit score, you might not be able to get a debt consolidation loan with an interest rate that is lower than that of your credit cards.
- Debt consolidation loans can have origination fees.
- Having a loan that pays off your credit balances frees up availability on your credit cards, and could be enticing to increase spend again.
Strategy #3: Balance Transfer Credit Card
Perfect for: Low balances that can be paid off quickly
A balance transfer credit card is a type of credit card that offers consumers an introductory rate — often as low as 0% — in exchange for moving one’s credit card balance to the new card. If you can pay off your balance within that introductory rate timeframe, which is typically around six months to one year, you’ll be able to pay off your credit card debt interest-free, which could save you a lot of money.
Because the introductory rate time period on balance transfer credit cards is typically around six months to one year, this option is ideal for those who not only have a fairly low total balance (think $2,000 or $3,000), but also those who have the discipline to pay back their debt quickly. If you don’t repay the balance within the 0% introductory timeframe, you could be forced to pay retroactive interest on the total balance.
- You could save money, as you’ll be paying off your credit card debt interest-free.
- You’ll be out of credit card debt fairly quickly.
- You can typically only qualify for a balance transfer credit card if you have a good credit score (think 690 to 700 minimum).
- There might be a limit to how much you can transfer, which could be lower than the total amount of credit card debt you have.
- Some cards will have a balance transfer fee in order to transfer your balance. This means you’ll be charged 2% or 3% for the initial credit card balance transfer.
Strategy #4: Home Equity Loan or 401(k) Loan
If you have equity in other areas, say in your home or in your retirement accounts, you can consider consolidating and paying off your credit card debt by borrowing from one of these assets. But this path should only be taken if you’re confident you’ll be able to pay back the loan, as you risk losing your home or your nest egg if you cannot repay the loan.
If you hold significant equity in your home, you can consider a home equity loan (HEL) or a home equity line of credit (HELOC), both of which will likely have lower interest rates than your credit card debt. If you have a significant amount of money in your 401(k), you can also borrow against your 401(k). However, doing this is risky — if you lose your job, you will have to pay back the loan immediately and you’ll be hit with penalties.
- In both cases, you’re borrowing against assets you own, which may offer peace of mind.
- You’ll likely secure lower interest rates than you have on your credit cards.
- Both loans can be accessed fairly quickly.
- One benefit of 401(k) loans is that they’re not reported on your credit report, which could help you improve your credit score.
- Both paths are incredibly risky. If you don’t have the financial wherewithal to pay back your loans, you jeopardize the roof over your head or your retirement savings.
- There may be administrative and origination fees associated with these types of loans. A HELOC might also require an appraisal, adding to the expense of this loan.
- In the case of HELs and HELOCs, you’re trading unsecured debt for secured debt.
The Final Say on Credit Card Debt Consolidation
Each option mentioned above requires a bit of discipline to focus on the repayment and to avoid ratcheting up your debt balances again. Create a system to limit your spending and to monitor your progress. Schedule a review of your payments and balances on a monthly bill payment calendar. Watching your balances decline can motivate you to keep going. If you need extra in-person help to stay on track, reach out to a credit counselor or open up to a trusted friend who can keep you accountable.
High-interest credit card debt can take an emotional toll that is difficult to escape. In fact, nearly 40% of people in credit card debt said they experienced unnecessary stress due to their debt. On top of that, one in three people said credit card debt affected their standard of living, while one in five people said it affected their health.
By committing to paying off your credit card debt once and for all, you’re not only prioritizing your financial health, but also your physical and emotional health. Before you know it, you’ll be able to breathe a sigh of relief knowing you’re finally debt-free.