Five Ways To Consolidate Credit Card Debt

It only takes one trip to the mailbox or five minutes in front of the television to know that there’s help available for debt consolidation. Companies are eager to help you get out of debt fast, lower your interest rates, and reduce your payments. All bold claims, but can they live up to those promises?

Consolidating credit card balances into a single low-interest loan with easy-to-manage payments looks good, in principle. However, it doesn’t always work out the way you planned – consolidating your loan could cost you more in the long run.

If you use a home equity loan, you might end up in the growing number of people who lose their homes this way. Then there’s the problem of “consolidation” programs that aren’t really consolidation loans at all – watch out for those. Even so, consolidation may be beneficial to you as long as you understand the options and proceed with caution.

Credit Card Balance Transfer

A balance transfer is a simple and effective way to consolidate debt without third-party involvement. You can safely move your balances to another card with a high credit limit and low balance-transfer interest rate, and save a few thousand pounds.

If you have a low credit limit, you can still transfer a portion of the balance from a high-interest card and ease the pain of that debt. Calculate your savings before you initiate the transfer to see if it’s a worthwhile move. There’s no point in consolidating debt if you’ll end up paying more.

Home Equity Loan

You can also use your home equity line of credit or home equity loan to borrow against the equity in your home. A home equity loan is a closed-ended account while a home equity line of credit is an open-ended account.

Nevertheless, both options give you access to more money at lower interest rates. The biggest drawback is that you’re using the equity in your home to secure your credit card debt, which is a risky move. There’s risk of foreclosure if you default on your payments. Compare that to falling behind on your credit card payments, which is not as risky.

Debt Consolidation Loan

A debt consolidation loan is used mainly to combine your debts into one payment. This type of loan is available through your bank or a debt consolidation agency. Be cautious when proceeding with a debt consolidation company because the extra fees will increase the cost of your loan. Instead of using such a company, you’re better off getting a low interest loan from your bank to pay off the debt on your credit cards.

Borrow a Life Insurance Policy

Borrowing from your life insurance is not the ideal solution, but it’s better than filing for bankruptcy. You can borrow up to the cash value of your loan to consolidate your debt. The insurance company won’t demand repayments, but it’s a smart idea to repay the loan because your borrowed amount will be deducted from the death benefit and affect the payout your survivors receive.

Borrow From Retirement

You can also use to your retirement fund as a last ditch effort to consolidate debt. Most retirement plans provide a borrowing facility, but the loan must be repaid or it will be considered an early withdrawal and subject to tax.

Even more frightening is the fact that you’ll be expected to repay the loan in 60 days if you lose your job. You’ll have to pay early withdrawal penalties if you cannot come up with the money to repay what you borrowed.

Drawbacks Of Consolidating Debt

These options all have risks, especially retirement and life insurance loans, but you should know they exist. Make sure to take an honest look at your finances and weigh your options before you perform a credit card consolidation. Understand the risks associated with your debt consolidation and take steps to repay the loans you take out to consolidate debt.

Know that when you consolidate debt, you’re not exactly paying the debt off. Instead, you’re shuffling the debt, so it becomes easier to pay. Moving debt around can cost more in the long run and risk your financial future.

Crystal Redhead-Gould understands that for many people consolidating their credit card debt is a useful tool in getting their finances back on track. Learn more about consolidating your debts on the uSwitch.com website.

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