Interest rates on mortgages and other loans have dropped to the lowest levels we’ve seen in years yet credit card interest rates have increased.
The credit card debt may be from overspending or from an emergency where credit was used to cover unexpected expenses. However, it can also be from simply using your credit cards in the same way you did five years ago.
If you had good credit in 2006 you may have been accustomed to using your credit cards for every purchase you made. This was an accepted practice not long ago.
Those with good credit ratings had low interest rates on their credit accounts and even the convenience of carrying plastic cards rather than cash was a solution even financial planners agreed with.
Today you may have the same good credit yet find your credit card interest rates have skyrocketed. You may seek the ideal debt consolidation method because the total payments on several credit cards are taking too big a bite from your budget.
In the past you could justify a 10% interest rate as the price of being able to pay of expenses over time. When that rate is 26% or even higher, the payments can be a drain on your finances.
Bank Consolidation Loan
The best debt consolidation method is to take a personal loan (not a high risk loan) to pay off the debt. Bank interest rates are a fraction of credit card APR today and you might save hundreds of dollars a month.
The bank loan will have a fixed monthly payment over a fixed number of months. You will know what the interest rate is when you take the loan and that will not change.
However, using this method does require you to have a credit rating and income that will allow you to qualify for a bank loan. You do not want to veer into the sub-prime lending area where the interest rate on a loan would be nearly as high as that on your credit cards.
Personal Consolidation Loan
This is the preferred consolidation method for someone with family members willing to help. A personal loan from a sibling or parent or close friend can allow you pay off high interest credit card debt.
This is a good choice for those who have suffered financial reverses that are out of their control. If you have family or friends who are willing and able to help you out you may be able to obtain a 0% interest loan!
If you choose this path, it is best to have a written loan agreement just as you would have with a lending institution. A payment amount and other loan terms should be clearly described so there is no misunderstanding later.
HELOC – Home Equity Line of Credit
The HELOC was the ideal consolidation method for many years. Today that is not the case and this is a consolidation loan you should avoid.
With home values falling there is a danger in mortgaging your home for more money than the property may be worth in a few years time. The housing market is uncertain today.
Though the HELOC was popular for years, it was not the ideal method for debt consolidation. It was an easy way when home prices were rising annually.
When the market collapsed it was the lines of credit that had been taken by homeowners that often caused them to go into foreclosure and lose their family’s home.
Moving Debt to a New Credit Account
If you qualify for a 0% introductory rate on a credit card with a reasonable rate of interest after the introductory period, this may be a valid consolidation for you. If you have the financial ability and the discipline to pay off the transferred debt during the introductory time period, you can save a significant amount of money.
You do need to know what the interest rate will be after the introductory period. There are also considerations of transfer fees and other terms that appear in fine print. There is no reason to transfer funds from one card to another unless there is a savings benefit for you.
Risks of Consolidating Credit Card Debt
Credit card debt is unsecured debt. It is not wise to pay off unsecured debt by creating secured debt. That is the main argument against a HELOC loan or against taking a loan using furniture or automobiles or any other physical property as collateral for the loan.
Debt consolidation will not help you in the long term unless you stop accumulating debt when you consolidate. If you take a bank loan or personal family loan to pay off crushing debt and then continue to make purchases using your credit cards you will only have more debt in the future.
If the combined payments on your credit cards are causing financial hardship, you should consider a debt consolidation loan. Carefully compared the options available and choose one that suits your needs.
If you obtain a loan to consolidate debt you should stop creating new debt at the same time. The best way to consolidate your debt is to obtain a loan from a family member or friend.
If that is not an option, a personal bank loan may be your choice. The third option is to obtain a new credit card with a lower or introductory interest rate and transfer high APR debts to that one account. Both a bank loan and a new credit card will require you to be creditworthy.