It is safe to say that credit card debt is making a comeback in the United States. Different researches show that the average American household is carrying credit card debt of around $15,000. The average interest rate that many American households with credit card debt have to pay can quite possibly be more than $2000 over the course of the upcoming year if these families only make their minimum credit card debt payment. There is, however, a financial tool that can help you get out of your credit card debt in a faster manner.
There is a method that is gaining real popularity among people carrying credit card debt and that method is called a credit card debt consolidation. Using a consolidation loan can set you on the right path towards debt relief and enable you to finally regain your financial stability. There are, however, many types of debt consolidation plans and programs. While some of them can really make the impact that you need, others can actually make things a bit worse. Below, we are going to look at:
- Debt consolidation plans that actually work
- Debt consolidation programs and plans that you should avoid
- And the overall risks of consolidating credit card debts
A credit card debt consolidation that can actually work
A debt consolidation loan is basically all your debt being combined into a brand new, larger, debt consolidation loan. By repaying that new loan, you will be basically repaying all your multiple credit card debts, as the proceeds of the loan will go directly to all of your creditors. A debt consolidation loan can bring you three main benefits:
A debt consolidation loan is simpler and easier to track
If you have multiple debts, that automatically means that each month you need to think and stress over a number of payments. That alone can be pretty hard and quite stressful. With a debt consolidation loan, you will be able to focus only on a single monthly payment which will ultimately make your budget planning a lot easier. And when you are going through tough financial times, repaying debt while also taking care of regular monthly bills, every feature that can make your life a bit easier is worth the consideration.
A new, lower interest rate
This is probably the most important benefit that any loan feature can offer you. By lowering your overall interest rate, you will most likely be able to repay your overall debt years earlier and with that, you will naturally save a lot of money doing it. And since this is so important, you need to pay good attention to your debt consolidation loan terms, making sure that the annual percentage rate on your brand new debt consolidation loan is lower than the annual percentage rate on your current debts.
It can improve the state of your credit score
In case you have your credit cards all maxed out, the utilization ratio of your credit cards is going to be really high. It is important to know that this utilization ratio may have a huge impact on your credit score, and not a positive one. When you are using a debt consolidation loan to pay off all your credit cards, you will actually be reducing the overall utilization on these credit cards. According to different research, people who are using debt consolidation loans to pay off their credit cards are having an improvement in their credits scores with around 20 points within just a few months after consolidating their debt into a credit card debt consolidation loan. Of course, the best and most certain way of improving the state of your credit score is to ultimately get rid of all the debt you are carrying.
The consolidation loan can give you a lower interest rate
Lines of credit and home equity loans
Before the financial crisis in 2008, home equity loans were one of the most used methods for consolidation. Home equity loans can give you several benefits. The two main benefits being an ability of an interest deduction and an overall lower loan interest rate. With that being said, however, going for a home equity loan can also be quite dangerous as you would have to put your house at risk. Normally, you can find pretty good rates on home equity loans from different credit unions, either a local credit union or a national credit union.
With the lending industry seeing tremendous growth in the past decade, getting a personal loan with good terms, including low interest rate, is actually not that difficult nowadays. Most private loan lending companies will be willing to work with you regardless of the state of your credit score, so you should have plenty of options to choose from. Make sure that you do proper online research on different private loan lenders and compare the loan terms that they are offering. That way you will be able to pick the loan lending company that is best fitted for your financial situation.
A transfer of a credit card balance
In order to gain new customers, many credit card companies are offering teaser interest rates that go as low as zero percent. If your credit score is good and you do not carry that much debt, transferring your credit card balance may work for you.
Credit card debt consolidation plans and programs that you should stay away from
Going for a home equity loan, a personal loan or a credit card balance transfer may be a really good option for you, especially if you have a perfect or at least a good credit score, and have a source of monthly income that enables you to easily manage your debt repayment while also managing your regular monthly bills. In case you are having a hard time paying your regular monthly bills and your credit score is not that good, you may be lured into using a debt management company. Keep in mind that in most cases, such companies often advertise themselves as companies that offer debt consolidation loans. The reality is quite different. What debt management companies do is that they make you pay them instead of paying your creditors.