How to Consolidate Your Credit Card Debt Credit Score, Finance Jun 17, 2013 By: Deidre Woollard If you are looking to buy a home but hold a large amount of credit card debt, it may make sense to consolidate your debt as part of your overall path to financial fitness. Obtaining a new loan with a lower interest rate allows you to knock out older debt with higher interest rates and to potentially pay off your loan more quickly. Methods of obtaining debt-consolidating loans offer varying levels of effectiveness, so it’s important to shop around. Generally, financial experts advise against debt-consolidation companies. They may offer a quick solution, but often they are costly and unnecessary. Debt-consolidation companies offer alluring solutions, as they offer to do all the hard work. They promise to roll up all your loans into one, replacing multiple loans with one low monthly payment. But you can call your creditors yourself and ask them to reduce your interest rate or to extend the repayment period. Often credit card companies will accommodate customer requests to ease payment, because they want to keep the business. Another way to consolidate debt is to transfer balances from one credit card account to another with a lower interest rate. Credit card companies offer low- or no-interest balance transfers to new customers to get them to sign up. Transfer fees can be high, up to 3 percent of the amount transferred, so if the sum transferred is large, the fee can drastically affect your savings. Also, the low interest rate is often a short-term proposition, typically from 6-12 months. When the period ends, the interest rate jumps back up, so if you haven’t paid off a significant amount of the balance by then, you may end up back where you started. Also, balance transfers can impact your credit score. Opening many new accounts at once can make you look like a bad credit risk. It’s important not to cancel old credit cards, even if you transfer the balance, because you may end up shortening the length of your credit history. If you already own a home, you may be able to use a home-equity loan to zap your credit card debt. Accessing the equity in your home is an excellent way of consolidating debt. You can open a home-equity line of credit (HELOC) or take a home-equity loan, both of which usually have low interest rates. You can use the home-equity money to repay credit card debt. Interest on your mortgage debt is tax deductible. Some experts recommend against using home equity to repay other debts, because it can put your home at risk. If you borrow money against the house and you are unable to repay the loan, you might lose your house. Refinancing a mortgage is another way of tapping into your home’s equity. You can take advantage of low interest rates with “cash-out” refinancing, which simultaneously provides needed cash and reduces the interest rate on your mortgage. The drawback of refinancing is that it reduces your equity in your property and lengthens your mortgage repayment period. If you do not have equity in a house, taking out a loan is your next-best option. Borrowers with fairly good credit can qualify for a bank or credit union loan. Interest rates can exceed 10 percent, but that is still considerably lower than most credit cards’ rates. Once you have established the new loan and paid off your credit card debt, be sure to pay each monthly installment in full. The goal is to eventually reduce your total loan liability so that you get on the road to financial freedom.
Posted on: Mon, 26 Aug 2013 19:43:57 +0000
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