I am not sure how good my credit is, but I need to consolidate my credit card debt. I was told that I can’t use my home to consolidate credit card debt? I owe about $225,000 and my home is worth about $250,000. Are there unsecured debt consolidation programs for credit cards?
Thank you for your question about unsecured debt consolidation programs for credit card debt. The most popular type of unsecured debt consolidation program is a personal loan. However, depending on your credit and financial situation, there are other ways to consolidate credit card debt.
Before you consider an unsecured debt consolidation loan, you might want to look at a secured loan option.
A secured debt consolidation loan means that you offer the lender security beyond your guarantee. The most common types are mortgages and 401-k debt consolidation loans. The primary benefit of a secured credit card consolidation loan is lower interest rates. Also, a mortgage offers low monthly payments.
If you have sufficient equity in your home, then you can consider a cash-out mortgage, home equity loan, or home equity line of credit to consolidate debt. In general, lenders allow for your total mortgage debt (current loan plus additional loan monies) to reach 80-85% of the value of your home.
Based on the information you provided, your current loan to value ratio is 90%, which means that you will not qualify for a home equity or cash-out mortgage. The main advantage of a secured loan is lower interest rates. Even with less than a prime credit score you can still qualify for a long-term mortgage that has low monthly payments. If you need low monthly payments and aren’t sure of your current home value, then check with a lender to see if you qualify for a debt consolidation mortgage.
The primary unsecured credit consolidation program is a debt consolidation loan. The main advantage of an unsecured loan is that you don’t need to bring additional collateral. Lenders will look at your credit score, credit history, and income to determine your interest rate.
To determine if you can benefit from an unsecured credit card consolidation loan, check your interest rates on your credit cards, and your credit score.
If you have an excellent credit score, then you can consolidate debt at a low-interest rate over a 3-5 year period. Today’s lowest rates are around 7%. Even if your credit is good, the interest rates might be lower than your current rates. You will also benefit from having one monthly payment and fixed payments that create a debt-free program.
For example: If you qualify for a 5-year $26,000 debt consolidation loan at 12%, your monthly payments will be about $578, and your total scheduled interest payments $8,701. If your average interest rates are 18% and you pay $660 per month for five years, then you would pay an addition $4,912 interest. If you decide to make declining minimum payments, your total interest would be more than $75,000. See Bills.com Minimum Payment Calculator to compare payment schedules.
If you can’t qualify for an unsecured debt consolidation loan or the interest rates are too high, then there are a few other alternatives that don’t require security or collateral.
The first alternative is a Consumer Credit Counseling Service, or CCCS. CCCS companies offer numerous services, such as financial counseling and budget planning, as well as Debt Management Plans (DMPs). In a DMP, the CCCS would arrange a new payment amount with each of your creditors, usually based on a reduced interest rate. You would then make a single monthly payment to the CCCS which would distribute the funds to your creditors, based on the new payment amounts. These plans come with a monthly fee and are not dependent on your credit score. However, it is essential to see the DMP offers better interest rates.
The second alternative is an unsecured credit card program that consolidates your credit card debt through a debt settlement program. Rather than making monthly payments to your creditors, these programs negotiate lump sum settlements with your creditors, frequently reducing your debts by 50% to 60% of your principal balances. These programs usually take only 2-3 years to complete, so this is a good option for many people to rid themselves of debt in a relatively speedy manner. Debt settlement programs are designed to help people in financial distress.
Can you qualify for a low-interest rate debt consolidation loan? Or, are you not sure if that is the best alternative? Check out Bills.com innovative tool, the Debt Navigator. With just a few questions and a soft credit pull that does not affect your credit, you get a personalized recommendation with up to five different debt consolidation offers, including personal loans, mortgage loans, credit counseling, debt settlement, and bankruptcy.