How to collect credit card debt

Americans’ collective credit card debt hit a record $1.17 trillion earlier this year, and Average credit card debt Now is $6,329. Managing that balance is even more complicated when your total debt is spread across multiple cards, each with a different interest rate and payment deadline.

Credit card debt consolidation is one solution. Integration is the process Paying off debt From multiple credit cards using a single loan or credit card. This streamlines your payments, allowing you to pay off your debt more efficiently. Consolidate your debt It can also help you save money on interest payments if you get a lower interest rate on your new balance.

The top seven ways to collect credit card debt

There are several options if you want to consolidate your credit card debt. Depending on your credit score and other factors, you may qualify for several types of loan consolidation, and it’s important to compare the pros and cons of each. Just because you can choose a given method, doesn’t mean it’s the best option for your financial situation.

1. Take a personal loan

People interested in consolidating their credit card debt often turn to personal loans as a solution. One advantage of doing this is that many lenders offer fixed interest rates, which provide a fixed monthly payment for the life of the loan. Because personal loans typically have lower APRs than credit cards for people with good to excellent credit, they can help you save money and pay off your debt faster.

You can get a personal loan from a bank, credit union or online lender. Extracting Unsecured personal loans – A loan with no collateral such as your home or vehicle – collecting a loan can be difficult for people with good or bad credit. If so, shop around at several lenders to find the lowest annual percentage rate you qualify for.

Some credit inquiries, called hard inquiries, can lower your credit score, but you can pre-qualify for a loan consolidation loan through many online lenders without worrying about damaging your score. This will let you preview your rate, loan term and loan amount that you will have access to after you formally apply. Keep in mind that these numbers are not guaranteed; They are only an estimate of what you may qualify for after rigorous testing.

2. Get a balance transfer credit card

Balance transfer credit cards allow you to transfer debt from other cards to a single card. They typically offer an introductory period of a year or more during which the credit card company charges a 0% annual percentage rate (APR) on the amount transferred. When the introductory period ends, the balance transfer card will charge you regular credit card interest rates on the remaining balance.

This card usually charges a One-time balance transfer fee (between 3% and 5% of your transferred balance). Even with the fee, the savings on interest can be significant – if you’re able to pay off the amount you transfer before the 0% promo rate expires. If, on the other hand, you pay a fee to transfer an amount and let it sit until it starts accruing interest again, this route could cost you more.

Another caveat: Many balance transfer cards only accept applicants with good or excellent credit scores. If your score is fair to poor, it may be difficult to qualify for one of these cards.

3. Tap into your home equity

If you are an important home owner Home equityAnother way to consolidate credit card debt is to take out a home equity loan or Home equity line of credit (HELOC) to cover your outstanding balances. Both of these financial products allow you to borrow against the equity in your home, which is the difference between the current market value of your property and the amount remaining on your mortgage.

Home equity loans and HELOCs typically have lower interest rates than personal loans because your home serves as collateral. Just keep in mind that they also come with closing costs and fees, and you’re putting your home on the line if you can’t make the payments on your loan.

4. Take out an auto equity loan

Similar to a home equity loan, an auto equity loan allows you to leverage the equity in a vehicle you own to consolidate your credit card debt. Because your vehicle is held as collateral, the interest rate on an auto equity loan is usually lower than the rate on an unsecured personal loan.

The main drawback of auto equity loans is that, because cars depreciate in value over time, you run the risk of going “upside down” on your car loan. This means you may owe more on the car than its current value. Plus, auto equity loans are hard to find — most major lenders don’t offer them — and your car can be repossessed if you default on the loan.

5. Use a debt management program

Debt management programs are specially designed for people struggling with various forms of debt. These plans, organized and run by non-profit credit counseling agencies, offer fixed monthly payments on your consolidated debt with low interest rates.

The downside to these plans is that it can take up to five years to pay off your entire balance, and they usually come with a small monthly fee. However, if you think you would benefit from the additional budgeting guidance a credit counselor can provide, this may be the best way to proceed, especially if you have a low credit score and are more Credit cards are not eligible for debt consolidation methods.

6. Turn to family and friends for loans

If you have family or friends who are willing to provide funds to help you pay off credit card debt, this can be a great option. Even if they charge you interest, a personal loan may come with better rates than debt consolidation loans from professional lenders. You also don’t have to worry about credit checks or damage to your credit score.

If your family or friends don’t have the funds to lend you directly, you can also ask them to co-sign a debt consolidation loan and this can help you get approved at lower rates.

Be aware that borrowing from a friend or family member risks damaging your relationship with that person if you are unable to repay the loan in full. Set clear terms and get a loan agreement in writing to avoid conflict.

7. Borrow from your 401(k).

In some cases, you may be able to borrow from your employer-sponsored 401(k) plan To pay off your credit card balance. Loans from a 401(k) are typically due over five years, but if you leave or are terminated, the balance will be due on tax day the following year.

Because you’re borrowing from retirement funds, using a 401(k) loan to consolidate debt carries significant risk. If you can’t repay the loan, the unpaid balance is considered a withdrawal from your account, meaning it’s subject to taxes and, if you’re under 59 ½, an early withdrawal penalty. Only consider a 401(k) loan if other credit card debt consolidation options aren’t available – and even as a last resort, you’ll find that this solution is often not recommended.

What you should do before consolidating your credit card debt

Don’t jump straight into credit card consolidation. Consider the following steps to ensure you are successful with the process.

Assess your financial situation

Start by making a list of all your credit card accounts, including their outstanding balances, interest rates, minimum monthly payments and due dates. Include other debts, such as personal or auto loans, to see how credit card debt fits into your overall financial picture. Then, add up all your credit card balances to figure out the total amount you need to consolidate.

The number you end up with will help you identify your consolidation options, including your loan amount or your balance transfer limits.

Create a budget

Debt consolidation can help you save money on interest, but you still have to be able to make payments on the new combined amount. For this, you may need to start with a square budget. Your personal budget should serve as a guide to cut extra expenses and avoid impulse purchases, ultimately helping you pay off your debt.

Weigh your integration options carefully

The best strategy for paying off credit card debt is the one that allows you to pay off your balance the fastest without jeopardizing your other financial goals, such as saving for retirement.

Compare APRs, credit requirements, loan terms and other loan terms to find the best option for your individual goals and financial situation. Use an online debt consolidation calculator to determine whether consolidating will lower your total costs or shorten your repayment time. Don’t forget to factor in fees like loan origination costs or balance transfer fees.

Seek expert advice

Consulting with experts can provide valuable insight into your financial situation. Professionals can help you understand your options, avoid costly mistakes, and create a sustainable plan to manage and eliminate debt.

Credit counselors, usually affiliated with nonprofit organizations, offer free or low-cost advice on the best way to pay off credit card debt and how to negotiate with debt collectors. They may charge for some services, however, such as facilitating debt management plans. You can also seek pro bono services from other experts such as financial planners and tax professionals.

Does credit card debt consolidation affect your credit score?

Consolidating your credit card debt can lower your credit score, but don’t panic. This drop in your credit score should be short-lived, and is usually caused by hard credit inquiries, which require financial institutions to review details such as your debt-to-income ratio, total outstanding debt and payment history. allows, to decide whether you are eligible. for a loan.

On the plus side, credit card debt consolidation can help you build your credit over time, despite the initial setback. Depending on your new consolidation loan limit, your credit utilization — the ratio of your outstanding balances to your total available credit — may go down, raising your credit score. (But note that this won’t happen if you close credit card accounts while consolidating your debt.)

Finally, consolidating credit card debt can make it easier to build and maintain a solid payment history, since a balance is easier to manage, especially with a lower interest rate. Payment history is the most important factor in your credit score, so making on-time payments can boost your credit score.