Credit card (CC) debt consolidation is a plan that takes more than one CC balance and combines them into one payment plan. Consolidating debts is ideal if new debts have a lower APR or Annual Percentage Rate compared to the user’s credit cards. It can minimize interest rates (IR), make the payment more manageable, or shorten payoff periods. The best way to consolidate these debts will depend on their score, how much debt they have, and other important factors. Listed below are the most effective ways to pay these debts:
- Refinance with balance transfer CCs
- Consolidate using personal loans
- Tap property equity
- Consider using 401K savings
- Start debt management plans
Balance transfer credit cards
Advantages
- Zero percent introductory Annual Percentage Rate
Disadvantage
- Needs at a good score to qualify
- Usually carries balance transfer fees
- Higher Annual Percentage Rates after the introductory period
CC refinancing is also called CC refinancing; this method transfers CC debts to a balance transfer card that charges, zero interest rates for a promo period, usually twelve to eighteen months. People will need at least a good score (usually 690 or higher) to qualify for a balance transfer card (BTC).
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An excellent BTC will not charge annual fees, but most issuers charge one-time balance transfer fees of three to five percent of the total amount transferred. Before people choose cards, they need to calculate whether the interest they will save over time will wipe out the cost of fees. Make sure to pay the balance down completely before the zero percent intro Annual Percentage Rate period is over. The remaining balance after that period will have regular CC interest rates.
CC consolidation loans
Advantages
- Direct payment to the creditor offered by lenders
- Low Annual Percentage Rates for good and excellent scores
- Fixed IRs means the monthly payment will not change
Disadvantages
- Financial institutions need a membership to apply
- Some debentures carry origination fees
- Pretty hard to get a low rate if you have a bad score
People can use uncensored personal debentures from financial institutions like traditional banks, online lenders, or credit unions to consolidate CC or other kinds of debts. Ideally, these debentures will provide individuals lower Annual Percentage Rates on their obligations. Credit unions are considering not-for-profit lending institutions that can offer their members flexible loan terms, as well as lower IRs compared to online lenders, especially for people with bad or fair credit (689 or lower on the Fair Isaac Corporation scale).
The maximum Annual Percentage Rate charged at government credit unions is eighteen percent. Conventional bank debentures provide more competitive APRs for borrowers with good or excellent scores, and benefits for existing clients may include more extensive debenture amounts, as well as rate discounts.
Most lenders on the Internet let people pre-qualify for CC consolidation debentures without affecting their scores, although this feature is not very common among credit unions and conventional banks. Pre-qualifying provide individuals a preview of the rate, terms, and loan amount they may get once they formally apply. Borrowers need to look for lending institutions that offer special qualities for debt consolidation. Some lending firms specialize in consolidating CC debts.
Other lenders will send debenture funds directly to the creditor, simplifying the application process. If you are not sure if personal debentures are the perfect choice for your needs, use debt consolidation calculators to consolidate all your debts in one place. Make sure to check the usual rate from lending firms and calculate savings.
Line of credits (LOC) or home equity loans
Advantages
- It has a much lower IR compared to personal debentures
- It may not need good scores to qualify
- Extended repayment terms keep payments much lower
Disadvantages
People may need equity in their homes to qualify, and home appraisals are usually needed. People also need to secure their properties, which they can lose if they do not pay their mortgage.
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If an individual is a homeowner, they may be able to take out loans or lines of credit on the equity of their properties and use it to pay their cards and other debts. A home equity line of credit or HELOC usually needs interest-only payments during draw periods – usually the first ten years. It means that people will need to pay more compared to minimum payment dues to minimize principals and make dents in people’s overall debt during this time frame.
Since the borrower’s property secures these debentures, they are most likely to get lower as compared to what people would find on BTCs or personal debentures. But people could also lose their properties if they do not keep up with their payments.
401K debentures
Advantages
- It has a much lower IR compared to unsecured debentures
- No impact on people’s credit scores
Disadvantages
- It can minimize people’s retirement funds
- It incurs heavy fees and penalties if individuals cannot repay
If the person leaves or loses their job, they may have to pay back their debentures quickly
IF they have a company-sponsored retirement account such as a 401K plan, it is not advisable to take a debenture from it since it can significantly impact their retirement. Instead, people should consider it after they have ruled out BTC and other kinds of loans. One advantage of this debenture is that it will not show up on the borrower’s credit report, so their scores are not impacted.
But the disadvantages are significant: If individuals cannot repay their loan, they will owe a considerable penalty plus taxes on unpaid balances, and they may be left with more debts. In addition, these loans usually are due in five years as well, unless account holders quit or lose their jobs; then, they are due on tax day next year.
Debt management schemes
Advantages
- It does not hurt a person’s credit score
- It may cut people’s IR by half
- It will not hurt people’s credit scores
Disadvantages
- It may take at least three years to repay the debt
- Startup and monthly fees are pretty common
Debt management schemes roll multiple debts into one monthly payment at a lower IR. It works best for individuals who have problems paying off their CC debts but do not qualify for other plans since they have low credit scores. This plan does not affect a person’s score, unlike CC consolidation options. If the debt is more than forty percent of their income and cannot be repaid in five years, then filing for bankruptcy may be a wiser option.