Consolidating debt is a widely-used, tried and true strategy for managing debt. It involves combining your credit card balances into one, easily manageable payment. Not only can debt consolidation reduce your monthly payments, but it can also save you money if you’re able to get a lower APR.
There are several ways you can go about consolidating your credit card debt, from balance transfer cards to consolidation loans, but which is best? We’ll cover the most popular avenues for consolidating debt, but which one you choose should depend on a few factors, like your financial situation and how much debt you have.
3 Ways to Consolidate Credit Card Debt
1. Consolidate Using a Personal Loan
You can consolidate your debt by taking out a personal loan with a lower APR than what you’re paying on your credit cards which will save you money in the long run. Aside from your traditional bank and credit union, you can also get a personal loan from a wide variety of online lending institutions. Some will even offer loans specifically designed for consolidating debt, which makes consolidating easier because they can transfer the funds directly to your creditors.
This is the best option for those who have good to excellent credit and are more likely to get approved for a personal loan with a low APR. For those with bad credit, you still may be able to get approved for a personal loan with a lower APR than what you’re currently paying, especially if you add a cosigner with good credit.
Take advantage of online lending marketplaces like Credible or Fiona that allow you to see what you qualify for with one pre-application.
2. Balance Transfer Cards
With a balance transfer credit card, you transfer all of your debt—whether it’s from a credit card or a loan—to this new credit card. Even if you just have one source of debt to transfer, it’s a great option because many balance transfer cards start with a 0% introductory APR before they start charging interest. You can get a better APR once the intro period is over if you have good credit.
This is the best option for consolidating debt if you can pay off the transferred debt (or most of it) before the 0% APR period expires, which is usually between 6-12 months. When you’re making payments to a 0% interest credit card, 100% of it is going to your debt and 0 towards interest, which will save you money.
Just make sure to always read the terms when signing up for a balance transfer card, as many lenders will charge a high-interest rate once the introductory period is over. You also want to consider what fees are involved. Some balance transfer cards will have a fee anywhere from 3-5% to transfer your debt to the card, or some will have a flat fee. Be sure to factor in any fees when deciding if a balance transfer card is worth it.
3. Debt Management Plan
The first thing to understand about a debt management plan is that it’s not a loan. It’s a payment plan offered by credit counseling agencies. This plan combines all of your credit card debt, cuts down the interest rate, and sets you up on a repayment path of 3-5 years.
A debt management plan covers unsecured debts only, like personal loans and credit card balances. It can’t be used for student loans or medical debt. It’s also worth noting that most plans don’t let you open new lines of credit (like credit cards) while on the plan.
This is a good option if you’re struggling to pay down your debt and have trouble qualifying for other options, like a balance transfer or a personal loan.
Staying Out of Debt
Staying out of debt goes beyond debt consolidation loans and payment plans, it involves changing your behavior when it comes to debt and eliminating the reasons why you have it.
Debt creeps up on us all, whether it’s student loans, medical bills, or simply too many purchases charged to a credit card. If you’re reading this article, it means that you’re starting to think about what repayment plan is right for you.
A crucial step is to acknowledge your spending habits and put together a budget. A spreadsheet that includes details like your income, debts, and expenses will help paint a clearer picture of your financial situation. With that clarity, you can more easily adhere to a budget and prevent more debt from piling on.
Consolidating debt and taking control of your finances can come in a variety of ways. A personal loan and balance transfer card could get you better rates while rolling your debt into one loan, or a debt management plan may be a better solution if you need a more structured path to repayment.
There are other options still, like tapping into your 401(k) or your home’s equity to help pay down or consolidate your debt, but in the end, what’s best comes down to your own financial situation.