There are three ways to consolidate your credit cards into one monthly payment, which we talk about below. However, before we explain how to consolidate credit card payments, a strong word of caution: You may not want to.
You may not want to consolidate your credit card payments for two reasons. First, with one or more credit cards at a zero balance, you may be tempted to charge! charge! charge! your way back to a high credit balance. A credit card balance consolidation should accompany a change in your behavior. Second, you may pay higher fees and interest if you miss or have a late payment on your big-balance account. At Bills.com, we encourage people to take positive steps with their money, and a credit card consolidation may not be the right choice for everyone.
Let us look at your three debt consolidation options.
The balance transfer credit card offers are available only on certain credit cards, and only well-qualified, high credit score applicants receive these offers.
On cards offering a 0% rate for balance transfers, the 0% rate is for a limited time. If you do not pay off the debt you transferred onto the new card within the promotional period, the credit card issuer begins charging interest on the remaining balance. Balance transfers are not a feature of all credit cards, and most credit cards do not offer a balance transfer option. If you are trying to consolidate debt by transferring your current credit card balances to one account, you must shop for cards offering that feature and carefully review the terms of each card to determine which offer will save you the most.
A cash-out refinance exchanges your existing mortgage loan for another with a larger balance. This is known as a "cash-out" refinance. The advantages of a cash-out refinance are the mortgage loan will almost certainly carry a lower interest rate than credit card debt, and is tax deductible. Paying off the credit card debt will result in a slight boost to your credit score.
There are significant disadvantages to consolidating debt with a cash-out refinance. Shifting unsecured debt to secured debt can create a difficult situation if you cannot afford the new mortgage payment. You could put yourself at risk of foreclosure. Refinancing to a 30-year loan means the total consolidation cost could be very high, too. Of course, you could refinance to a 15-year loan that would have a low interest rate. If you can afford the payment, a 15-year loan would be a less costly choice for a debt consolidation refinance.
Personal loans, also called a signature loan, are a loan based only on your promise to repay the loan. They are risky for lenders due to their lack of security (such as a house or car as collateral) and high default rate. As a result, most lenders charge high interest rates on personal loans, especially those for people with a low credit score.
Using an unsecured personal loan to consolidate debt may cost more than continuing regular payments on your existing credit cards.
Debt settlement is a debt consolidation strategy where you enroll your accounts with a debt settlement company. You stop making payments on the enrolled accounts and instead, make payments into a special bank account. Over time, the debt settlement company negotiates with creditors to reach lump-sum settlements for debts.
The advantages of debt settlement are a relatively short time to debt freedom. Also, the monthly payments can be lower than monthly minimum payments for enrolled credit cards, and are always lower than credit counseling. The disadvantages are calls from creditors to encourage the consumer to resume payments and leave the debt settlement program. Also,typ your credit score is damaged during the program.
Credit counseling is a process where you meet with a counselor to create a household budget. The counselor creates a debt management plan that divides your monthly payment among your creditors. A typical debt management plan last 5 years, and has a high monthly cost. The advantage to credit counseling is creditors do not call you asking for payment. Also, credit counseling has the potential to cause less harm to your credit score. However, this varies.
A loan may not meet your needs. Consider credit counseling or debt settlement as alternatives to consolidating your credit cards into one monthly payment.