Credit card debt can sneak up on you. It starts with just a few swipes here and there. Next thing you know, you’ve got multiple credit card bills for thousands of dollars, and each bill is racking up 19% interest or more. This can result in an endless cycle of struggling to make your minimum monthly payments just in time to meet the due date — only to see that payment made virtually no impact due to interest charges.
You can get out of this endless interest rate cycle through an array of debt relief options, ranging from using a credit counselor to negotiating settlements with credit card companies. One great option is debt consolidation, which rolls multiple credit card debts into one payment and reduces interest rates to help you save money.
Below, we’ll cover the six best debt consolidation options.
A debt consolidation loan is an unsecured personal loan you take out to pay off all or most of your high-interest credit card debt.
It usually has a lower interest rate than your credit cards. Plus, a debt consolidation loan turns multiple monthly payments into just one loan payment. With fewer payments to worry about, you’re less likely to miss one and get dinged with a late fee or a late payment on your credit report.
Debt consolidation loans also offer fixed loan terms — the repayment plan remains the same for a set period of time — so you know exactly when you’ll pay it off.
In the digital age, debt consolidation loans are relatively easy to find with a quick online search. You can get these loans from a wide range of lenders, including traditional banks and credit unions or online lenders that only offer debt consolidation loans. Many also offer instant approval.
Once you’re approved, some debt consolidation lenders will pay off your credit card debt for you. Others will put the cash in your bank and allow you to pay it yourself.
Debt consolidation loans are easy to find, but they’re not particularly easy to get approved for. Most low-interest consolidation loans require a good credit score and an acceptable debt-to-income ratio to get approved, so you could run into issues if your credit card debt has dragged your credit score too far down.
There are debt consolidation loans that cater to folks with bad credit, but these often come with higher interest rates. In some cases, these interest rates are higher than a credit card, taking away one of the key benefits of debt consolidation.
Also, read the loan terms carefully, and watch out for origination fees and other charges that can significantly raise the loan’s cost.
Because a debt consolidation loan will add a new loan to your credit history, there is the potential for it to impact your credit score negatively. However, since you’re using it to pay off credit card debt and reduce your credit utilization, consolidating may have no net impact on your credit score or even result in a slight credit score increase.
Another option for consolidating credit card debt is to take out a home equity loan. A home equity loan leverages the equity you have in your home — the difference between how much the home is worth and how much you owe on the mortgage — and allows you to turn some of that equity into a low-interest loan. You can then use that loan to pay off some or all of your credit card debt.
Because a home equity loan is a mortgage, it often has a far lower interest rate than most other loans. Also, being a mortgage means it may include longer repayment terms, potentially lowering your monthly payment. Like a debt consolidation loan, a home equity loan also turns multiple credit card payments into a single payment.
While a home equity loan has plenty of benefits, it’s not all roses. The biggest issue is you must have enough equity in your home to take out the loan. Plus, most banks limit the loan amount to just 80% of the equity in your home and require good credit and an acceptable debt-to-income ratio to get approved.
Using a home equity loan also means you’re risking foreclosure if you fail to repay the lender. In addition, it may include an origination fee and other significant closing costs.
Finally, a home equity loan reduces the equity in your home, which may become an issue if you attempt to sell or refinance in the future.
A HELOC, much like a home equity loan, uses your home’s equity to give you access to cash to repay debts. The difference is a HELOC gives you a reusable line of credit instead of giving you a lump sum of cash. With a HELOC, you can use as much or as little of your line of credit as you need during the draw period — the time when you’re permitted to use the HELOC.
The draw period typically lasts for 10 years. During this time, you can make interest-only payments on any amount you use to pay off credit card debt. However, you should try to make principal and interest payments to maximize a HELOC’s lower interest rate.
After the draw period ends, you enter the repayment period. During the repayment period, you’ll pay principal and interest on the remaining HELOC balance.
A HELOC’s key benefits are its lower interest rate and longer financing terms. Plus, it offers more flexibility than a home equity loan with its payment options during the draw period.
A HELOC has all the same downsides as a home equity loan.
Transferring high-interest debt from one credit card to another may seem counterproductive, but there are some significant benefits to using a balance transfer credit card.
The biggest benefit is many balance transfer credit cards offer a 0% introductory rate for a fixed period, typically six to 18 months. You’ll pay no interest during that introductory period, allowing you to save money.
Having 0% interest for a set promotional term also means you can create a fixed debt management plan. For example, if you transfer $2,000 onto a 0% balance transfer credit card with a 12-month term, you know you can pay $166.67 per month and be debt-free without paying a penny of interest.
You must also consider the downsides to a balance transfer credit card, starting with the transfer fee. Balance transfer credit cards generally charge a 3% to 5% balance transfer fee. If you transfer $1,000, the balance transfer credit card will add $30 to $50 to the balance. This is far less than you’d pay in interest if you left that balance on a high-interest credit card, but it’s worth considering.
Another downside is you’ll need a good credit score, as most 0% balance transfer cards are picky about who they approve. Plus, if you don’t pay off the full balance before the introductory term ends, you’ll start accumulating interest. And, there’s also the potential for an annual fee, which can sometimes be $100 or more.
You must also consider your credit score. Getting another credit card can negatively impact your credit score, as it’ll involve another hard credit inquiry and add a new credit card to your credit report.
There’s also the option to borrow from friends or family members. There are several benefits to asking for a loan from friends and family, including low- or no-interest loan terms, flexible payment arrangements, no credit check and the trust it builds when you repay them.
There are, however, some serious potential downsides to this. The largest downside is the possible mistrust in your relationship if you default on the loan. Also, the loan amount is limited to how much your friend or family can afford, you may not want others to know your financial situation, and it doesn’t help build your credit.
Tally can also help you manage your credit card debt consolidation with its low-interest line of credit. This line of credit allows you to pay off your credit cards one by one while saving on interest. On top of saving interest, Tally makes the monthly payments on the credit cards linked to your account, so you won’t miss a payment. You just make a single payment to Tally, and it handles the rest.
What’s more, Tally doesn’t require excellent credit to get approved. In fact, Tally typically requires a minimum FICO credit score of just 660.
When looking to pay off debt by consolidating it, you have a wide range of options, including:
- A debt consolidation loan
- A home equity loan
- A home equity line of credit
- Balance transfer credit cards
- Borrowing from friends and family
- A personal line of credit, like Tally
All six options help get you debt-free while paying minimal interest. Choosing the best way to consolidate credit card debt depends on which option suits your financial situation and needs. Some borrowers even choose to combine multiple options.
Regardless of which fits you best, now’s the time to start saving on interest and getting out of credit card debt.