Credit card consolidation can be a smart move if you’re struggling with your debt load. With just a few simple steps, you can consolidate your credit card debt and improve your financial situation.
1. Assess your debt load. First, you must know just how much credit card debt you actually have. Gather all of your credit card statements and add up exactly how much you owe. Find two sums: your total debt load and your total estimated monthly payments. This will help you find the best method for your credit card consolidation.
2. Know your monthly income. Look at your take-home pay, but also subtract your monthly expenses. This includes mortgage, food, utilities, car, etc. Chances are you vary how much you are currently paying toward your credit card debt each month depending on how much extra money you have when your payments are due. Knowing how much of your income is already obligated toward bills can help you to figure out how much is available for credit card consolidation.
3. Choose a loan product to pay off your credit cards. There really is no good reason to continue paying high credit card interest rates. Using your home or a personal loan, you can avoid high interest rates through credit card consolidation.
- Cash-out refinancing. The purpose of this option is to turn your home equity into cash, which can then be used for credit card consolidation. It involves taking out a new mortgage with a larger principal than your current one. You may have slightly higher monthly mortgage payments, but you have your credit card debt wrapped up in your mortgage for significant savings in interest.
- Home equity loan. This type of loan also involves borrowing against the equity in your home. The lender uses a formula to determine your credit limit and you can borrow up to that amount. Home equity loans can be very useful for credit card consolidation. Instead of paying high interest credit cards, the debt is consolidated in the home equity loan at a much better interest rate.
- Personal loan. If you do not own a home or do not wish to use your equity for credit card consolidation, another option is a personal loan. They carry a higher interest rate than loans secured by a home but a lower rate than credit cards.
4. Know the risks. If you choose to use your home equity for credit card consolidation, be sure you understand the risks. The benefit is that you get better interest rates because the loan is secured to your home, but using your home as collateral is also a risk. If you default on your loan, you run the risk of losing your house. Borrowing against your home should always be carefully considered before jumping in.
5. Control your spending. The final step to credit card consolidation is to use financial restraint. Once you have consolidated your credit card debt, it is vital to keep your spending in check so that you don’t fall into the trap of running up even more high-interest credit card debt.