With five options for relief available, you have to find the right fit for your financial profile.
Credit card consolidation allows you to roll multiple high interest rate credit card bills into a single simplified repayment schedule. The right solution used in the right circumstances can lower your monthly payments, reduce total interest charges… or both. But with five ways to consolidate credit card debt, how do you know which path is right for you?
In many cases, it’s all about which option you can qualify for effectively. It’s not just about getting approved; it’s about getting approved at the right rates and terms to accomplish your goals.
Option 1: Do you qualify for DIY debt transfer?
A balance transfer credit card allows you to move balances from existing accounts to a new card with 0% APR. Here’s what you need to pay attention to determine if this is the best option in your situation:
Primary Qualification Factor: Credit score
- Can you get approved for the new credit card?
- Do you qualify for a long enough introductory term to pay off all your debt?
This option relies on the highest credit score possible. It’s important to note that just because you can get approved, it doesn’t make this the best choice. You must be able to qualify for a 0% APR introductory period that allows you to eliminate all your debt.
This means a mid-range score is often not enough. Let’s say you have $10,000 in total balances to pay off. If you only have fair credit, you may qualify for the new account. However, the 0% APR promo may only last six months. That means you’d need to pay over $1,667 per month to pay off your debt before regular interest kicks in.
By contrast, with an excellent credit score, you can get a promo period of 24 months. You quadruple the amount of time you have to pay off your balances in-full. You’d only have to pay around $420 per month to eliminate all your debt.
Option 2: Can you qualify for an effective consolidation loan?
A personal consolidation loan allows you to use a low interest rate unsecured loan to pay off your credit cards. Here again, credit score is the biggest factor for consolidation. But your budget also comes into play in determining how effective this solution is for your situation.
Primary Qualification Factor: Credit Score
- Can you get approved for the loan?
- Will you qualify with an interest rate of 10% or less?
If the rate is any higher, you really don’t get enough of a benefit to use this solution. Ideally, you want the rate to be closer to 5%. So, the better your credit score, the more likely that this solution will work effectively.
Secondary Concern: 5-Year Payoff Clock
Experts say that for a credit card debt elimination strategy to be effective, you need to reach zero within 5 years. Anymore than that and you either pay too much in total interest charges or you fall out from reduction exhaustion. That’s when you tire of living on a limited budget and avoiding new credit card expenses. Most people can handle a 5-year window, but anymore than that and it’s less likely you can stick with it.
So, the next question to ask is can you afford to pay off your balances within 60 payments or less? A longer term means lower monthly payments but higher total costs. You want to get out of debt as quickly as possible. Make sure before you choose this option that you can afford the payments on a loan term that’s ideally between 36 to 60- payments.
Options 3 and 4: Home Equity Loan / Home Equity Line of Credit (HELOC)
First Qualification Requirement: Are you a homeowner?
If the answer is no, then these solutions are a no-go. You must own your home in order to use it’s equity.
Second Qualification Requirement: Do you have equity available?
If you just purchased your home or it’s underwater (you owe more than it’s worth), then these options won’t work. You must have equity available – that’s the property value of the home minus your remaining mortgage balance. You can generally borrow up to 80% of the equity you have available.
So, if the home is worth $200,000 and your mortgage balance is $100,000, then you can borrow up to $80,000 in a home equity loan or HELOC. If you have no equity available or not enough equity to pay off your balances, you need another option.
Option 5: Debt management program (DMP)
Sole Qualification Requirement: Do you have income to make a single monthly payment?
Since a debt management program is basically an assisted form of debt consolidation, it has easier qualification standards. You can qualify regardless of your credit score. And, you can usually take care of more debt faster. In some cases, people successfully pay off upwards of $100,000 in less than 5 years. That’s the edge you get in asking for professional help.
So, the only real requirement for eligibility is whether or not you have enough income to cover the monthly payment. The plan usually reduces your total credit card payments by 30-50 percent. As long as you have the money to cover that reduced payment, you can qualify through a credit counseling agency.
Qualification shouldn’t be your only consideration
Just because you can qualify to a debt relief option, it doesn’t make it the right choice. For example, if you’re a homeowner with excellent credit you can qualify for a HELOC at a low rate. However, you may not fancy the idea of increasing your risk of foreclosure. By the same token, almost anyone can qualify for a DMP; however, many people don’t like the idea of a hard credit freeze.
These are the other concerns you need to consider as you weigh your options:
- Balance transfer
- Expect a $3 to 3% fee on every balance you transfer
- Some creditors don’t allow you to transfer balances from their own cards. For instance, Chase says you can’t move a Chase balance to their balance transfer card.
- Personal debt consolidation loan
- Zero balances are extremely tempting if you have a bad credit habit. If you can’t stop pulling out your plastic, this option can give you a false sense of being debt free. You end up running up your balances again before you pay off the loan.
- Home equity loan / HELOC
- Increased foreclosure risk! If you don’t pay your credit cards, creditors can’t take your home. If you don’t pay a home equity loan or HELOC, the lender will start the foreclosure process.
- Debt management program
- Your creditors freeze all the credit card accounts you include in the program; you also can’t apply for new credit while enrolled. You can keep a card out of the program for emergencies, but counselors often advise against it.