Credit cards have one of the highest interest rates when compared to other lines of credit. When you have debt from multiple credit cards, this amount you pay in monthly credit card bills tends to be quite high. That is why it is essential to consider consolidating your credit card debt
Debt consolidation is a great way to lower the cumulative amount you pay in interest on all your credit cards through a single monthly payment. Here are 5 methods you can use to consolidate your credit card debt.
Credit card refinancing or balance transfers help transfer all your credit card debt to a single credit card. These are special offers granted by most credit card companies and when you choose to transfer your credit card debt from one account to another, you are charged little to no interest on your repayments for up to 18 months. After the 18-month promotional period, the previous, much higher interest rate is reinstated. Other debt consolidation options offer much longer promotional periods to pay off your debt.
Balance transfer options are only available to people with high credit scores. If you have a credit score lower than the one accepted, you should consider other debt consolidation options.
Personal loans are one of the best options for debt consolidation. They are unsecured loans with high rates of interest. However, it is better than having debt from multiple credit cards and paying interest on each of them.
Personal loans give you a little more breathing room with repayments. They have longer repayment tenures and fixed monthly instalments. Most personal loans have repayment tenures of up to 5 years. While longer repayment tenures mean smaller monthly instalments, you do end up paying much more in interest.
Debt management plans
Debt management plans combine all your credit card debts into monthly instalments at comparatively lower interest rates. This is a helpful option to choose when you don’t qualify for personal loans or credit card refinancing.
Debt management plans do not have any impact on your credit score. Use online credit counselling agencies to help you find a debt management plan that would work for your financial situation.
Loan against a retirement account
If you have a 401(k) or an IRA, you can take out a loan against your account to consolidate your debt. The IRS allows you to borrow up to 50% of the amount in your 401(k) with a cap of $50,000. The amount you are permitted to borrow depends on whichever of these amounts is lesser.
You have 5 years to repay the amount you borrowed or else it counts as a premature withdrawal. You will be charged a penalty fee and will have to pay income tax for it.
Borrowing from your retirement account poses no risk to your credit score. It has a much lower rate of interest than other debt consolidating options than personal loans and credit card refinancing.
Loan against a life insurance policy
If you have a permanent life insurance policy that has the option for a loan, you can use this facility for consolidating your credit card debt. The interest rates on these loans are generally low and don’t require you to make payments every month.
If you die before repaying the amount you borrowed, the balance is deducted from the death benefit that is paid out to the beneficiary.
Some life insurance policies also offer you the option of making a partial withdrawal that does not require you to repay the amount.
Like loans taken out against retirement accounts, you don’t need to meet the credit score criteria. Borrowing from your policy also doesn’t affect your credit score. The only requirement is that the amount withdrawn must pay off your credit card debt and whatever regular payments are due.