Make your goal to combine your credit card bills to pay them off quickly at the lowest cost
Many people ask Bill "How do I consolidate my credit card bills?" He answers that there are several ways to consolidate credit card debt. Depending on your financial situation, one or more of these options may be best for you. Before you choose any single option, weigh the pros and cons of all options. Your goal should be to consolidate your credit card bills so you can pay them off faster and for less money without risking your home or other personal property.
Credit Card Balance Transfer
If you have good credit and credit card debt, then you probably receive numerous balance transfer offers every month. Although these offers are tempting, read the fine print carefully for these elements:
- Transfer fee
- Offer period
- Interest rate
- Interest rate after offer period expires
Most balance transfer offers include a transfer fee of 3-5%. Look for either a card with no transfer fee, or a fee cap of $50-75 per transfer. Before transferring any credit card balances, calculate how long it would take to accrue that much interest on each balance at your current interest rate. If you currently have low rates, the transfer fee may cost you more than the accrued interest if you can pay off the debt relatively quickly. If the balance transfer interest rate isn't 0%, even a low rate plus transfer fees could cost you much more than you current rate in the long-term.
Also look at the interest rate after the offer period expires. Some jump to as high as 20%. If you can't pay off the transferred credit card balance before that term ends, you could get hit with high interest charges.
You may also receive numerous offers for personal loans. Personal loans are not back by collateral, so you don't risk your home or personal property when you take out the loan, but you should still be careful. Often the offer includes a low interest rate, but you must have excellent credit to qualify. The lower your credit score, the higher the interest rate. Carefully review the terms before you accept an offer for a personal loan.
Home Equity Loan or Refinance
You can also consolidate credit card bills by folding them into your home equity loan, line of credit, or home mortgage refinance. This option has two advantages:
- You'll receive a much lower interest rate because the loan is backed by your home.
- The interest may be tax deductible.
This option also has risks:
- If you can't make the new payment, you could lose your home.
- You may also pay more over time because the credit card balance is paid over a longer term.
- If you use a home equity loan or refinance, you may also have to pay closing costs, which can be quite expensive.
The best option may depend on the total amount of your credit card bills. If you could pay them off within a year by being frugal, then a balance transfer or personal loan is best. If you have a large credit card balance but are determined to make a fresh start, then a home equity loan may be just what you need.