Credit Card Consolidation: What’s the Best Choice for You

credit card consolidation - what's the best choice for you

If you’re struggling with high-interest credit card debt, it’s easy to feel overwhelmed. Debt is stressful. And once you’ve been in debt long enough, it can be hard to see the light at the end of the tunnel. The good news is, while you can’t simply wish your debt away, there are things you can do to ease the burden a bit. One popular option is consolidation.

By consolidating your credit card debt, you may be able to find lower interest rates and more favorable terms that will help you save a little money — and maybe even pay down your debt faster. Of course, debt consolidation isn’t for everyone, and some options are more appropriate than others, depending on the amount you owe, your credit score, and other factors.

Here’s a quick guide to some of the most common debt consolidation options out there, so you can see which one might be right for you:

Balance transfers. Credit card companies typically offer a super-low (or sometimes even zero percent) introductory interest rates for customers interested in transferring a balance, which can help you pay off your debt faster. Keep in mind, though, that once the introductory period is over (which is typically anywhere from one year to 18 months), you’ll be back to paying interest payments. A few other things to remember: You’ll also need a decent credit score to qualify, and most balance transfer offers come with some kind of fee, so you’ll have to consider how the cost of a balance transfer stacks up against the potential savings in interest.

Bottom line: If you’re close to paying down your credit card debt, have good credit, and want to shave a few hundred bucks off of your credit card debt, a balance transfer might be the solution for you.

Loans from a bank or credit union. Like a balance transfer, a personal loan from your bank or credit union is a way to save serious money on interest payments (bank loans typically have much lower interest rates than credit cards). Even better: There’s no “introductory rate,” which means the interest rate you get won’t double or triple after a year. This makes it ideally suited for folks looking to save on interest but who may not be able to pay off their entire balance in a year

Of course, you’ll still need a fairly high credit score to get approved for a personal loan from your bank or credit union, so this option may not be the best choice if you have a history of late or missed payments.

consolidation applications

Home equity line of credit (HELOC). A HELOC allows you to borrow money from a bank or credit union using your home equity as collateral. The upside to this is that, because a HELOC is secured against your home, you’ll get lower interest rates and larger borrowing limits you would with a personal bank loan. The downside is that you’re basically trading unsecured debt for secured debt: If you can’t make your payments, you could lose your house.

Peer-to-peer lending. Peer-to-peer lending is exactly what it sounds like: Rather than borrowing from a traditional bank or credit union, you borrow from “investors,” who are just regular people (or, in some cases, groups of people). Two of the more popular peer-to-peer lending companies are Lending Club and Prosper.

Your credit still matters with peer-to-peer loans, and applicants are rated on how much of a “risk” they present to potential investors. At the same time, though, peer-to-peer lending offers a bit more credit score wiggle room than you’ll find with a traditional bank loan. Peer-to-peer lending networks also offer faster application and approval times and lower interest rates than banks.

A few things to know before you consider going peer-to-peer: It’s prohibited in a few states, so do a quick internet search to figure out the rules where you live. Peer-to-peer loans also tend to have high fees for late payments.

Debt management plan (DMP). DMPs are arranged through credit counseling organizations, who work with you to create a formal debt repayment plan. Typically, your credit counselor will take a look at things like your income, bills, and the amount of credit card debt you’ve got — and then they’ll negotiate with your credit card company to lower your monthly payments and/or your interest rate.

There are a few unusual things about this option: First, when you have a DMP, you don’t pay your credit card lenders. Instead, you pay the credit counseling organization and they make credit card payments on your behalf. Second, your credit card(s) will essentially be closed during the three to five years it takes to pay down your debt, which means you will need to be able to make ends meet without the use of credit.

Remember: Any debt repayment or consolidation program begins with changing the way you use credit. If you’re serious about getting out of debt, you’ll need to make some larger changes: For example, you’ll need to create a budget — and stick to it. You should also stop using your credit cards so new charges don’t pile up. To learn more about responsible credit use, repayment options, and more, you can always reach out to the team at American Credit Foundation.