Key takeaways
- If you need help with credit card debt, there are many options and resources to lend a hand.
- Debt consolidation will give you one bill to pay monthly―with a better interest rate than cards.
- A home equity line of credit not only brings a great rate―it’s often tax-deductible!
The average credit cardholder carries $4,789 in balances , according to CardRates.com, and some borrowers may need help in paying it off. Fortunately, there are viable options out there.
One method is debt consolidation: You combine your debts “under the same roof” with a better interest rate and a single monthly payment. “If you have numerous accounts with high minimum payments and interest rates, debt consolidation may be an answer,” says Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network . “It’s helpful for people who are confident they can (adopt good) habits and want to focus on just one rate and payment.”
What’s more, you can get great advice about what those good habits are: A financial planner can help you develop a sound, monthly budget plan, or contact the National Federation for Credit Counseling , which provides financial education to millions of consumers every year.
How do you know if debt consolidation is right for you? Consider our experts’ recommendations about the following three ways to do it:
1. Consolidate debt onto one credit card. You can transfer every one of your credit card accounts to one main card. You’ll want to find a card with a favorable, initial interest rate, without a transfer or annual fee. “Be sure to pay off the balance before the favorable, initial rate expires,” Gallegos says.
After transferring a balance, you probably will want to keep your old card accounts active—without adding any new charges—to lower what’s called your “credit utilization ratio.” This ratio compares the amount of credit you’re using to your overall available credit, and counts for about a third of your credit score. The lower the ratio, the better your credit rating.
To illustrate: If you transfer $2,000 each from three different cards to a single card with a $10,000 limit, and then close the three original card accounts, you’ll end up with a $6,000 balance on the one new card. This exceeds the recommended maximum of 30% of the credit limit, which in this case is $3,000. However, if you keep those original three accounts open—while ceasing to use them—you would have a $6,000 balance on $40,000 of available credit (assuming all accounts have $10,000 limits). This gives you a much lower credit utilization ratio. Also, remember that long-standing accounts with positive payment histories favorably affect your credit score, even if you no longer use those cards.
Is credit card consolidation right for you? You may be a good candidate for credit card debt consolidation if you’d benefit from transferring multiple balances from multiple cards to one, big loan (or card) with a lower rate.
2. Consolidate through a home equity line of credit (HELOC). HELOCs allow consumers to open a line of credit secured by their house. Homeowners can then borrow money when needed to consolidate debt or to fund future emergencies without having to apply for a new loan at possibly higher rates. You often have to pay the same fees as you do with a first mortgage (e.g. an application fee, title search, appraisal and, of course, points). Still, with a HELOC, you typically gain access to up to 85% of your home’s value, minus what’s remaining on your mortgage.
HELOCs are considered viable finance options for those who face a big expense and lack an emergency fund. Because the line of credit is backed by collateral—your house—the interest rate tends to be lower. Secured loans such as these have lower rates than unsecured ones, like your credit card, because you’re putting up a house or car or something else of value. Even better, HELOCs are often tax-deductible when you use them for home improvements. Talk with a tax advisor to be sure.
“You may be able to reduce your monthly payments via lower rates and long repayment terms,” says Kevin Haney, a former sales director for the credit bureau, Experian, who now runs growingfamilybenefits.com, a finance information/education site.
Is a HELOC right for you? You may be a good candidate for a HELOC if you have a large amount of debt you want to consolidate or you want an extra cushion for future emergencies, and you have sufficient equity.
3. Consolidate with a personal loan. You can refinance debt into a fixed-installment loan, too, with one monthly payment, due date and interest rate.
Another advantage: Personal loans usually carry a 2-4% lower interest rate than credit cards, with a repayment period of 36 to 60 months.
Is a personal loan right for you? You may be a good candidate for a personal loan if you have multiple accounts you’d like to simplify into one, long-term payment while possibly lowering your interest rate.
Learn how to take control of your finances with a personal loan. Then find out more about personal loans available to you as an NEA member. And run your numbers through our interactive personal loan debt consolidation calculator to see how consolidation might be able to help you better manage your debt obligations.
