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. Here are the steps to take to 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 your mortgage, food, utilities, car payment, cable bill, and more. 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. Below are the options for this:
- 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.
- 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.
- 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.
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.
Does it Make Sense to Consolidate Credit Cards?
In order to determine if consolidating your credit cards makes sense for your situation, ask yourself the following questions:
- Is the interest that you are paying on your credit cards significantly more than you would pay on a home equity loan, 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 stay out of it in the future.