'Tis the season for shopping and opening credit card accounts to get great deals on all of your holiday purchases. While getting deep discounts for a day of shopping seems like a great idea, your budget may reveal the wreckage later. Consolidating debt may help you get your finances back on track by streamlining several payments into one payment that's easier to manage. Depending on finance charges associated with your credit cards, it may also be possible to lower interest rates and other fees associated with individual credit cards.
Consider Your Debt Consolidation Options
There are multiple ways to consolidate debt. Although you may be considering borrowing from a family member to pay off debt, the consequences of borrowing money from family members can strain your relationships and require you to reveal your finances to your parents or other relatives. You may have other debt consolidation options that won't cause difficulties with family members:
- Personal loans or lines of credit: You can use a personal loan to pay off credit card debt and other loans. Financial institutions typically charge lower rates than credit cards and you won't be faced with costs associated with refinancing your mortgage. A personal line of credit, also called a signature loan, provides a credit line that can be used for paying off debt up to your available credit limit. A personal credit line typically carries a variable interest rate. Personal loans and lines of credit may require payment of a loan application fee, but don't carry annual fees.
- Credit card balance transfers: You may qualify to open a new credit card with an introductory zero to low interest rate. You can use this option to transfer other credit card balances to your new card and pay off the new balance before the introductory interest rate expires. The Consumer Financial Protection Bureau advises that credit card balance transfers usually require payment of a transfer fee of three to five percent of each balance transferred. For example, if your transfer a balance of $500 with a three percent fee, you'd be charged a fee of $15.00. Credit card companies offering balance transfers don't allow transfer of balances from their own cards to your new card. If you open a card for balance transfers with XYZ bank, you won't be able to transfer an existing balance with XYZ bank to your new card with XYZ bank. Also, balances on credit cards are often subject to additional fees such higher rates if you make a late payment. There may also be annual fees for credit cards.
- Home equity loan or line of credit: Homeowners may be eligible to borrow a home equity loan for a specific amount or a home equity credit line that can be used as needed. Loans secured by your home are considered mortgage loans and usually carry lower interest rates than credit card accounts or other unsecured loans. Home equity loans and lines of credit don't cost as much as taking out a cash-out refinance, but the Federal Trade Commission notes that both options are secured by your home, which means that you could lose your home if you don't make payments.
Things to Keep in Mind
- Debt consolidation isn't the same as paying off debt: Consolidating debt transfers several debt balances into one loan. You're still responsible for paying off your consolidation loan. Transferring credit card debt to a debt consolidation loan can lead to a false sense of security; if you run up balances on your credit cards after debt consolidation, you could end up owing more than you did before consolidating your debt.
- Consider your spending habits: If you are a compulsive shopper or repeatedly carry balances on credit cards, consider consulting a financial advisor or credit counselor to analyze your spending habits and find a solution.
- Always shop for your best deal: Interest rates and fees charged vary by lender. It's a good idea to compare offers for the debt consolidation option you want.
Consolidating holiday debt can streamline bill paying and may also help you save on finance charges. Gaining control of consumer debt can be the best gift to give yourself for the New Year.