You’ve seen a lot of mixed messaging if you’ve been reading up on credit card consolidation as a way to get your debt under control. Some sources say consolidation is absolutely the way to go. Others say avoid it at all costs. Still others say certain types of consolidations are good, while others are bad.
Fortunately though, reading between the lines will help you find the main things to look for in a credit card consolidation to ensure it works for you.
Here are the most important elements.
Lower Interest Rate
One of the primary advantages of doing a consolidation is the opportunity it affords you to lower the overall interest rate you’ll pay to satisfy the terms of your cardholder agreements. In most cases, credit card annual percentage rates (APRs) are running between 15 and 25 percent these days.
Shortest Term Possible
Combining multiple high interest accounts into a single one at a much lower rate will save you money — if you can get the consolidation loan paid off in a reasonable amount of time.
The longer the term of the loan, the more money you’ll pay out in the form of interest and the slimmer your advantage becomes. Thus, you’ll want to keep the loan term as short as your ability to make the monthly payment will allow.
Home equity lines of credit are frequently highlighted as useful credit card consolidation tools. Granted, they are a bit easier to qualify for than personal loans and they usually carry lower interest rates as well.
However, they present more risk too.
A home equity loan is secured by your home.
Sure, this makes qualifying somewhat easier and garners you a better interest rate. Thing is, trading unsecured credit card debt for secured home loan debt means you could lose your house if you’re unable to repay the loan. You should only go this route if you absolutely know you’ll be able to repay that loan.
This isn’t something you do speculatively.
A Window You Can Fit Into
You’ve probably seen a lot of zero interest balance transfer offers advertised too. The prospect of completely eliminating interest payments while you pay off your credit card debt is certainly an enticing one. This is especially true when you have a lot of high interest debt to resolve.
You just need to be certain you can pay off the entire amount you transfer during the introductory period. In most cases this is about a year, which means you should only transfer as much as you know you can cover within 12 months.
Otherwise, you could find yourself facing a higher interest rate than the ones you’re trying to evade. Moreover, some issuers will apply that rate to the entire transferred amount retroactively from the date of the original transfer. Moreover, they will do so regardless of the remaining balance when the introductory period concludes.
Nearly every balance transfer card comes with fees. You’ll also encounter fees with home equity lines of credit. Some personal loans impose them as well. These fees are sometimes added to the amount of the balance you transfer, which means they can accrue interest too.
These five factors are the main things to look for in a credit card consolidation offer. Keep them under control and you’ll have a great shot at coming out ahead. Overlooking them could make your problem worse than it already is.