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Credit Card Consolidation - What You Need to Know
Before Consolidating Debt (Part 2)
Consolidation Options
Now let's take a look at some of the options for consolidating. When it
comes to consolidating your credit card debt you have several options at
your disposal, each with its own set of pros and cons. Here's a brief
description of some popular options along with their relative pros and
cons.
Low-Rate Credit Cards
If your credit rating is good enough to qualify for a low-rate credit
card, possibly even a zero percent introductory rate, transferring all
your higher rate credit card balances could be a good option. This
option generally works best if you can pay the balance off within one
year. Check out our Card Reports section to evaluate different low-rate
credit card offers.
Pros
- If you qualify for a low-introductory rate card you may get the benefit
of not paying any interest for a time.
Cons
- Excessive transfer and new account activity on your credit history could
cause you to have a poor credit score. This is bad when your low-rate
credit card expires and you aren't able to qualify for a new card. You
could be stuck with a high interest rate.
- Watch out for balance transfer fees. Fees could potentially outweigh any
interest savings that you might realize.
Home Equity Loan or Home Equity Line of Credit
Because you're using your home as collateral for this type of debt, it's
imperative that you really understand your repayment plan and deal with
the issues that got you into debt in the first place. Detweiler suggests
this is not a good option in a hardship or crisis situation, including a
job loss, since failure to pay back a home equity loan could result in
the loss of your home.
Pros
Usually a lower interest rate.- Interest is normally tax deductible.
- Your monthly payment will usually be lower so you can use the difference
between it and your fixed monthly debt payment to start building an
emergency fund.
Cons
You will be trading unsecured debt for secured debt putting your home at
risk. If you miss even one payment you could lose your home, whereas if
you left it as credit card debt you would still have a place to live.- You could end up paying a lot of money in fees such as closing costs and
appraisal fees. Make sure you shop around to find the best deal.
- The entire loan must be repaid before you can sell your house.
Personal Loan
Because of the potential effects of high credit card debt on your credit
rating it may be difficult to qualify for an unsecured personal loan
with a decent interest rate. If your credit rating is good you may
qualify for a rate in the low-teens, but if it's poor you may end up
paying around 20 percent. Shop around at a variety of financial
institutions including credit unions to compare the cost of fees and
interest. And be aware that generally the extra products they try to
sell aren't worth the cost you'll pay.
Pros
Can get good rates, especially if you are a member of a credit union and
have good credit.- Unsecured so you don't have to worry about losing your home.
Cons
Your credit rating could drop further because of credit inquiries,
closing old accounts, and opening new accounts.- Additional fees.
Now you've got some tools under your belt to help dig your way out of
credit card debt. You can also browse our Articles Section for more
information about credit cards and debt. Good luck in your quest to be
debt free!
(Read Part 1)
By Amy L. Cooper-Arnold,
CardRatings.com
Staff Writer
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