- 7 min read
- The best way to consolidate credit card debt depends on your financial situation and goals.
- Personal loans, balance transfers, cash-out refinance and home equity mortgages are popular ways to consolidate debt.
- If you are in a financial hardship look for other debt relief solutions.
Choose the Right Way to Consolidate Credit Card Debt
There are many paths to solve credit card debt problems. The best way to consolidate debt for you, may not work for someone else. The right way, or the best way to consolidate credit card debt, is subjective and depends on your financial situation and goals. Do you want to save money, lower your payments, get collectors off your back, or make it easier to pay your credit card bills? Do you have equity in your house, a substantial income, savings, and extra money at the end of the month?
The primary ways to consolidate credit card debt are as follows:
- Balance transfer and payment maximization
- Home Equity Loan or cash-out refinance
- Unsecured personal loan
Other debt relief solutions include credit counseling, debt settlement, and chapter 13 bankruptcy. If you cannot take a new loan to consolidate debt and are having trouble making the payments, then check out these other debt relief options. Depending on the depth of your problem and willingness to deal with stress, one of these programs may be best for you.
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Match Your Financial Situation with Your Goals
A key component in finding the best solution for your debt problems is to do a thorough financial check-up. Create and maintain a budget to best utilize your financial resources. Control your costs, limit your credit card debt, and build up emergency funds, savings and retirement accounts. To find the best way to consolidate credit card debt, concentrate on these questions:
- Cash flow: Do you barely make ends meet, or do you have plenty of cash reserves at the end of the month?
- Home Equity: Do you have a lot of equity in your house or you are underwater?
- Credit Score: Do you have a strong credit score or you are struggling with a poor one?
Your goals will vary based on your financial situation. Choose between lowering your payments or paying off your debt quicker or a combination of the two.
Find the Right Credit Card Consolidation Path!
The best way to consolidate credit card debt is the one that fits you. No matter which path you choose, take the following two steps:
- Avoid minimum payments: In general, monthly minimum payments on a credit card are equivalent to about 2-3% of your balance. Your monthly payment declines as your balance declines until a minimum fixed amount kicks in. Minimum payments are the worst way to pay off your credit card debt as it increases the time to pay off your debt, is expensive, and maintains a high credit utilization ratio.
- Save money: Save on your monthly expenses. Use Bills.com saving machine to give you an idea of how cutting expenses, like a cup of coffee a day, can save you lots of money.
Here are the different paths that you can take:
Balance transfer: If you have good credit, then consider trading in your old card for a new lower interest rate card. Be careful not to take a new card that has a great introductory offer and then hits you with high interest rates.
Constant (or accelerated) payment: Instead of making minimum payments that decrease over time keep your monthly payment constant. Continue to make the minimum payments on all your cards except for one that you make larger payments. Don't drop your monthly payment. Either pay off the highest interest rate card first or the one with the lowest balance. You will finish your payments much quicker, but it requires discipline to maintain the same high payment.
Cash out refinance: A cash-out mortgage loan requires equity in your home and a good credit score. This option allows you the cheapest interest rates and the most flexibility in the time to pay off your debt. Today’s low-interest rates make it attractive to refinance mortgages, and if you have enough equity, then you can do the cash out refinance.
HELOC: You will need sufficient equity in your home that can be a problem in today's market if you have a large first mortgage. HELOC's carry higher interest rates and a shorter period than a cash-out mortgage loan refinance. However, closing costs are lower, because you take out a smaller loan.
Unsecured personal loan: Major and credit unions offer unsecured loans. In general, you need good credit to take out a personal loan and the payback period is limited to about five years. The rates can go up quite significantly, making it unattractive to consolidate credit card debt with a personal loan. If you have bad credit, then be very careful, because personal loans for bad credit carry high-interest rates. Very aggressive collection agencies service these types of loans.
Get A Unsecured Debt Consolidation Loan Offer
Bills.com makes it easy to shop for a debt consolidation personal loan. Start by filling in your credit score, zip code, loan purpose, and the amount of loan you need. Check out different offers and click on the appropriate ones.
Cost Comparison of Three Easy Ways to Consolidate Credit Card Debt
Before you decide on the best way to consolidate credit card debt, understand the implications of each solution. Look through the example below to get an idea of the monthly payment, total interest cost, and terms of three common solutions (cash-out mortgage refinance, Home Equity Line of Credit, unsecured personal loan) and two do-it-yourself solutions (fixed payment using the snowball or avalanche method, and minimum payments). The example below assumes::
- Credit Card Balances: $25,000
- Interest rate: 18% (weighted average for all cards)
- Minimum payment: 2.5%
The table below shows the total interest payment and time to pay off the debt under each alternative. The better the credit score and the more equity you have in your house, the more flexibility you have. You can take out loans for different periods, and the interest rates will change accordingly.
|Minimum Payments||Cash-out Mortgage Refinance||HELOC||Unsecured Personal Loan||Fixed Payment on Credit Card|
|Monthly Payment||Starts at $650 and decreases. $20 minimum.||$158||$236||$541||$550|
|Term (to pay off)||405 months||240 months||180 months||60 months||77 months|
|Total Interest Payments||$36,731||$12,959||$17,846||$7,464||$17,303|
Tips on Finding the Best Way Consolidate Credit Card Debt
Two general conclusions:
- The worst way to pay off credit card debt is to restrict yourself to minimum payments.
- Do not consolidate credit card debt and then run up new debt.
The best way to deal with your debt depends on your financial situation:
- If you have equity in your house and good credit, then do a cash-out refinance or HELOC. Shop around for the best mortgage deal.
- If you have good credit, but no equity in your house, then take an unsecured personal loan or credit card balance transfer. Shop around for the best deal and concentrate on banks and credit unions.
- If you have bad credit, then your options are limited. Work on improving your credit score. Maximize your credit payments, getting rid of high interest payments. Try to consolidate your balances on your low interest cards. If you can afford the minimum payments, then look into credit counseling and a debt management program.
- If you have bad credit and have difficulties making your payments, then consider a debt settlement program.
It takes hard work and persistence, but you can find the right path to consolidate your credit card debts and be debt free.
Debt Navigator - Find a Way to Consolidate Credit Card Debt
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Dealing with debt
Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q4 2022 was $16.91 trillion. Auto loan debt was $1.55 trillion and credit card was $0.99 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 8% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
Each state has its rate of delinquency and share of debts in collections. For example, in Minnesota credit card delinquency rate was 2%, and the median credit card debt was $453.
While many households can comfortably pay off their debt, it is clear that many people are struggling with debt. Make sure that you analyze your situation and find the best debt payoff solutions to match your situation.
Can a credit card company sue me if I receive a small SSI award and a VA pension? I have too much debt and can't afford the payments. I was thinking of doing debt consolidation but not sure I can afford that, either.
I am happy to answer your question, with the understanding that I am not giving you legal advice.
First, it is good that you are looking at all your options, including debt consolidation. I think it is wise to avoid committing to any program if you feel you can't afford the monthly payment.
A creditor can sue you if you default and likely obtain a judgment against you. But having a judgment doesn't mean the creditor can necessarily collect.
In your case, your income is protected; this kind of debt can't lead to a garnishment on your SSI or VA pension.
Another route a judgment creditor can take is to go after your bank account, but there are steps you can take to protect yourself. Two months of your benefits are protected IF your income is directly deposited into your account (or loaded onto a prepaid card). If it is a paper check that you deposit, the funds are not protected the same way. If you have more than two months of benefits in your bank account, the surplus funds can be taken in a bank levy, accounting for exemptions present in your state collection laws.
I have read that it is possible to go to court and show that the income itself is protected, even in cases where a person had more than two months of benefits and had money taken. I just don't know if that is successful in all cases. Prudence dictates not keeping more than two months of benefits in your account and having the funds directly deposited.
I also recommend, if you are sued, that you make clear to the bank manager that you have two sources of protected income.