Best Ways to Consolidate Credit Card Debt

Kathleen Esposito
Financial documents

Consolidate Credit Card Debt

Consolidation is a great option to help you get out from under credit card debt. Instead of having many different bills to pay each month, you combine them all into one lump some -- ideally, with a lower interest rate.

The consolidation route you take will depend on a few things, including how much you owe, your current interest rates, and your desired timeline for getting the debt paid off.

Signature card

Secure a Bill Consolidation Loan

Add up all of your unsecured debt and talk to lenders to find out if a bill consolidation loan is available to you. Make sure the interest rate is less than you are currently paying on your credit cards. If it's not, you may wish to transfer the debts to your lowest interest rate credit card instead.

Man with credit card

Get a Credit Card Balance Transfer

If you have a credit card with a low rate, consider transferring your balances to that card. Alternately, you can open a new card to take advantage of a balance transfer promotion, such as 0 percent interest for six months.

Before doing so, read all of the terms of the offer. You need to know what the rate increases to after the initial promotional period and what happens if you are late or miss a payment. There are also fees typically associated with balance transfers. The deal may not be as good as it appears to be at first glance, so be sure to understand all the terms beforehand.

House made of dollar bills

Consider a Home Equity Loan

If you own your home, you may be able to pay off your debt by using a home equity loan or line of credit. Since your home serves as collateral, interest rates on these loans are typically low. However, borrowing is limited to a percentage of your equity, and if you default on your loan you risk losing your home.

Ask your tax advisor about deducting the interest from your loan on your taxes. In many cases, this can be an extra perk to this option.

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Use a Consumer Credit Counselor

If you are unable to qualify for new loans or increase your credit card limit due to your current spending habits, talk to a nonprofit consumer credit counseling agency. The agency can help you consolidate debt into one payment by offering you a payment plan.

When you give the agency a lump sum each month, it will use that money to work with your lenders to get your debt paid off. Be careful which agency you choose. It's best to find one that is not for profit and is endorsed by the Department of Justice.

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Borrow from Your Retirement Plan

If you have an IRA or 401(k) plan, you may be able to borrow from it to pay off other debt. For some people who have no other option, this is the best way to consolidate credit card debt at a low interest rate.

Before pulling money out, ask your tax advisor how doing so will affect your taxes for the year. You may be charged a penalty for withdrawing funds early, so ask if you can simply borrow money using your account as collateral instead.

Bankruptcy form

Consider Chapter 13

Chapter 13 bankruptcy is a method of restructuring your debt so that you can pay off over a longer period. You should see bankruptcy as a last resort, since it has a negative effect on your credit for seven years. However, even this option is better than simply ignoring your bills.

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Talk to Family and Friends

Though many would rather not, in desperate situations it may be necessary to talk to family and friends to see if they can offer you a loan to repay your debt. It can help to reassure them that the debt will be repaid and to come up with a repayment schedule ahead of time.

Eventually you may be able to take care of your debt and to raise your credit score.

Kathleen Esposito
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Best Ways to Consolidate Credit Card Debt