If you have 4 or 5 high interest credit cards, you may be paying hundreds of dollars in interest charges every month. Consolidating your debt is a good way to get control of your finances and eventually pay off all of your debts. Just what is the best way to consolidate credit card debt?
Sometimes you have one credit card that has a very good interest rate. You can lower the effective rate you pay on all of your cards by transferring balances from high interest rate to low interest rate cards.
Many people get in trouble taking out consolidation loans, paying off the debt and then running the debt right back up. They effectively are put in a worse position because they now owe on their credit cards and they owe on the consolidation loan.
Consolidation Debt Loans
A consolidation debt loan is a loan that is used to pay off some or all of your credit cards. Simply pay off your outstanding credit card balances and then focus on repaying the consolidation loan. If you are able to take out a personal loan at a lower interest rate than that of your credit cards, this type of loan makes sense.Personal Loan
A personal loan is one type of unsecured loan that can be used to consolidate credit card debt. As long as you have good credit and a job or steady source of income, you can probably qualify for a personal loan. No collateral is required and terms are generally more favorable than that of credit cards.
Home Equity Loan
Another painless way to consolidate debt on your credit cards is to take out a home equity line of credit. If you have equity in your house, this type of loan comes with a low interest rate. If you are not in dire financial straights, but just want to get rid of the high interest you are being charged every month, a consolidation loan, either personal or collateralized, is something to consider seriously
Low Interest Rate Credit Card
Sometimes you have one credit card that has a very good interest rate. You can lower the effective rate you pay on all of your cards by transferring balances from high interest rate to low interest rate cards.Special Offers
Occasionally a credit card issuer will offer you a free balance transfer and no interest for 6 months when you sign up for a new card. As long as the other terms of the card are reasonable, it makes sense to get the card, transfer high interest balances and pay the balance off on the new card.
Pay High Interest Rate Cards First
You should pay off the highest interest rates cards first. Try to cut back on spending and pay as much as you can toward the debt. Once you get started, it will become easier to continue. You might even get a second job so you can pay down the debt even faster. There’s another school of though, called the debt snowball, that states you should pay off your smallest debt first regardless of interest rates. While you will end up paying more in total interest using this method, there may be a psychological advantage involved.
A Word of Caution
There is one word of caution to consider. Using a secured asset (your home) to pay off an unsecured debt (credit cards) can be the wrong decision if you are in such a poor financial position that you may very well file bankruptcy in the near future. If you do take out the loan, make sure you use it to pay off the credit cards and not for something frivolous like a Vegas vacation.Many people get in trouble taking out consolidation loans, paying off the debt and then running the debt right back up. They effectively are put in a worse position because they now owe on their credit cards and they owe on the consolidation loan.
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