Debt consolidation is when you use one loan or credit card to pay off several high-interest credit cards or other debts. Since you’ll only have one balance instead of multiple, it’ll be easier to manage your debt. Also, if you’re able to land a lower interest rate than the rates you currently have, you’ll save money on interest in the process.
Debt consolidation methods
There are several ways you can consolidate your credit card debt, including:
- Debt consolidation loan: A debt consolidation loan is an unsecured personal loan that’s specifically intended for paying off debts. It typically comes with a fixed interest rate and repayment term so you can budget for payments in advance.
- Credit card balance transfer: If you qualify for a balance transfer credit card, ideally with a lower APR than your current credit card, you can move multiple balances to it to consolidate your debt and make one monthly payment at a lower interest rate rather than several.
- Home equity loans: You may want to consider a home equity loan or home equity line of credit (HELOC) if you have equity in your home. While a home equity loan offers a lump sum of money, a HELOC is a revolving line of credit.
- 401(k) loans: If you have a 401(k) retirement plan, it is possible to borrow money from it for debt consolidation. Since this method might cost you a penalty and hinder your retirement plans, think twice before you choose it.
How to consolidate your credit card debt
If you move forward with debt consolidation for your credit card debt, follow these steps.
- Add up your debt: Determine how much credit card debt you owe. If you decide to consolidate it with a loan, this figure will inform you of how much to borrow.
- Calculate your average interest rate: There are plenty of online calculators that can help you come up with the weighted average interest rate of all your credit cards. Try to find a lower rate than the average you currently have.
- Consider your budget: Take a close look at your budget. Once you pay your monthly bills, how much can you put toward paying off your credit card debt?
- Choose the right method: While the most common debt consolidation options are personal loans, balance transfer credit cards, and home equity loans, you can also consolidate debt with your retirement account. Figure out the best choice for your unique situation.
By consolidating your credit card debt, you’ll find the payoff process to be easier and more affordable. Just make sure you choose the ideal strategy for your particular needs and avoid racking up more debt.