How to consolidate credit cards

If you are drowning in credit card debt, you may be able to save money and pay your debt off more quickly if you choose to consolidate credit cards. By evaluating your situation as well as your options, you can determine whether this makes sense for you.

Credit card debt typically means paying high interest rates because credit cards are unsecured loans. If you decide to consolidate credit cards, you can wrap up that debt in a loan with a much lower interest rate. There are a few different options for this.

Home equity loan
A home equity loan (HEL) can be a great tool to consolidate credit cards. You borrow against your home equity to get a loan at a fixed rate. Although the interest rate on a HEL is usually higher than that of a first mortgage, it is also usually far less than a credit card. Instead of making payments to each of your credit card companies each month, you make just one payment on the home equity loan. Suppose you were paying 18 percent interest on your credit cards. With a HEL, you may get a rate of 6 percent. That is a third less in interest, and it really makes a difference in your monthly payment after you consolidate credit cards. It is important to remember that if you take out a HEL, your home equity will be tied up and will not be available to you if you sell your home. Also, the HEL must be repaid upon sale of the house.

Cash-out refinancing
Another option if you want to consolidate credit cards is cash-out refinancing. This means refinancing your mortgage to one with a higher principle so that you can get some of your home equity back as cash for you to use. You can use it to consolidate credit cards if you choose. It is possible that your monthly mortgage payment may not even go up if you use cash-out refinancing. Even if it does, your monthly debt obligation will still be less since you consolidated your credit cards into your mortgage. You will definitely pay significantly less in interest. However, the loan is secured by your home, so remember that you can lose your home if you default.

Personal loan
A personal loan can be used to consolidate credit cards if you do not own a home or choose not to use your home equity. Instead, you can obtain a personal loan from a lender at a lower interest rate than a credit card, although it will probably be a higher rate than a loan that uses your home as collateral.

Does it make sense to consolidate credit cards?
Now that you know your options, the next step is to decide which one makes sense for you. Ask yourself the following questions:

  • Is the interest that you are paying on your credit cards significantly more than you would pay on a HEL, cash-out refinancing, or personal loan?
  • Do you have more credit card debt than you are able to pay off in a few months?
  • Do you have enough home equity to use to pay to consolidate credit cards but still have some left over in case you need to sell your home?
  • Can you restrain your spending so that you do not fall further into debt after you consolidate credit cards?

If you answered yes to all or most of these questions, then consolidating may be a smart choice for you. Investigate your options and work out a plan to get out of credit card debt, and to stay out of it in the future.

 

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