To “get all of your ducks in a row” means to get organized so you can act effectively. Perhaps nowhere is this saying more relevant than when it comes to credit card debt repayment. Trying to keep up with multiple, high-interest balances every month is often a recipe for disorganization. You may start to feel like all the money you’re throwing at your debts is barely making a dent. Or worse, one of your balances may become lost in the shuffle.
Consolidating your credit card debts involves streamlining them into a single loan. Here are four approaches to debt consolidation, each with its own pros and cons to consider.
Transfer Your Credit Card Balances
Credit cards are notorious for carrying high interest rates, often upwards of 15 or 20 percent. You may be accruing significant interest on balances you’re carrying month to month, especially if you’re routinely paying the minimum amount due.
One potential solution is transferring your credit card balances from high-interest cards to a low- or no-interest card. This buys you some time off from paying high interest — a minimum of six months all the way up to 21 months for some cards. You’ll pay a fee, usually between three and five percent, per balance transfer.
Take Out a Consolidation Loan
Which sounds better; paying off five high-interest lines of credit each month or paying off one-low interest loan each month? Taking out a debt consolidation loan from a bank or credit union provides the funds to wipe out your outstanding credit card balances. You can then focus on repaying that single loan for its term, usually at a lower interest rate. It’s simpler to make predictable payments on one loan than it is to juggle multiple credit card balances.
This strategy can be advantageous if your credit score allows you to qualify for a low-interest loan — and if you can commit to paying it back on time and in full. Crunch the numbers before taking out a loan to avoid inadvertently paying more interest in the long run than you would on your credit cards.
Work with a Credit Counseling Agency
You may qualify for a Debt Management Plan (DMP) through a non-profit credit counseling agency. First, a credit counselor will review your specific financial situation. If a DMP is a good fit and you decide to proceed, your counselor will negotiate with your creditors in an attempt to get them to lower your interest rates and fees. Meanwhile, you’ll be responsible for making a single payment each month to your credit counseling agency, which your counselor will then distribute among your creditors. You will be responsible for maintaining this payment for the duration of your DMP, often three to five years.
The benefits here are that you may be able to knock down the amount you’re paying toward interest and fees. You’ll also only be responsible for making a single monthly payment. One possible drawback is that you may have to close all your credit cards for the duration to avoid racking up any more debt — something that can negatively affect your credit score.
Refinance Your Mortgage
A cash-out refinance involves replacing your current mortgage with a larger one, then taking the difference out in cash — which you can use to pay down your high-interest credit card debts.
Here’s an example from NerdWallet: You have a $100,000 mortgage remaining on your home worth $200,000. This means you have $100,000 in equity from which to draw. You may decide to refinance your mortgage for $150,000, so you’ll get $50,000 in cash. Then you can use this cash to address your higher-interest debts.
The important thing to remember whenever you’re considering refinancing your mortgage is that you’re lengthening the repayment timeline. And your home is at risk of foreclosure if you falter on your payments.