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While popular culture cautions against the placement of all of one’s eggs in a single basket, consolidating credit card debt can make those financial obligations easier, cheaper and faster to pay off. The key is gaining a solid understanding of the details to be certain the method you choose will in fact generate the advantage you’re trying to achieve.
Here’s how credit card consolidation can save you money
Zero percent transfer offers abound for consolidating credit card debt. Taking advantage of one of these will give you the opportunity to pay your debt off in full with no additional interest charges — if you can satisfy the debt within a certain amount of time.
However, meeting that requirement is critical. The consequences of not paying it off during the introductory period include the imposition of an elevated APR on the entire transferred balance. Moreover, some card issuers apply this rate going all the way back to the date the transfer happened — on the entire amount shifted — regardless of how much of it has been paid down.
Thus, the key here is ensuring you can meet the time requirement to reap the full benefit. You’ll also need to watch out for transfer fees, which can be a percentage of the transferred amount.
This credit card consolidation tool will net you a lower rate of interest and give you more time to satisfy the debt than a balance transfer. In addition to carrying lower rates, these simple interest loans do not compound the way a balance transfer card does if the balance isn’t cleared up before the introductory period expires.
Going this route can get you from three to five years to pay off the debt. However, the longer it takes to pay it off, the more interest you’ll pay, so you need to make sure the duration of the loan is such that your total interest payments will be less than you’d incur if you paid the credit cards on their regular schedules.
Be apprised though, you’ll need an outstanding credit score to qualify for this.
Home Equity Lines of Credit
Here again, you’ll benefit from a lower interest rate — often even lower than that of a personal loan, because this instrument is secured by your home. That’s right, you’ll pledge your house as collateral to pursue this approach.
The upside here, as we mentioned above is super low interest rates compared to credit cards and personal loans. It’s also a bit easier to qualify, as your house provides the lender with a measure of security.
On the other hand, many financial experts advise strongly against trading unsecured credit card debt for secured debt in the form of a home equity loan. After all, you can just walk away from credit cards and take the hit to your credit score. However, the stakes are raised considerably once you turn it into a home equity loan, because you could lose your house if you can’t pay.
While the potential savings are less than with any of the above methods, debt management also entails the least risk. Moreover, your credit history is largely irrelevant.
OK, well, not exactly.
You actually have a better chance of getting a debt management program approved if your credit score has slipped. Creditors look at management programs as a chance to be made whole before you avail yourself of a more drastic form of debt relief such as settlement or bankruptcy. Thus, they will agree to certain concessions, which can lower your total debt.
Whichever strategy you pursue, one of the most important things to remember is to stop charging things while you’re working your consolidation plan. Otherwise, you’ll pile debt on top of debt, which will cost you more money in the long run when the whole idea is to use credit card consolidation to save you money.