In these tough economic times its easy to run up too much money on your credit cards, whether it be from loss of a job, bad investments you were counting on to withdrawal in emergencies, or a multitude of other reason. Whatever the cause, the result is still identical; you have too many bills with not enough money to pay them. The best option is to reign in your spending habits and save enough money to pay back your cards as quickly as possible. However, for people already on a tight budget this may be impossible. If this is the case for you, it may be in your best interests to consolidate your debt instead of paying each card off individually.
The Benefits of Consolidation
There are several benefits to consolidation. Most times you will get better interest rates with a consolidation loan or balance transfer offer than you had on your old card. This is especially true of home equity loans. If you're deep in debt, just a few percentage points can add up to substantial savings each year - savings you can use to repay the principle on your loan.
There is also only one bill to pay each month. You only need to remember one due date and one creditor to pay instead of remembering the due dates on several different cards or loans. In most cases, your monthly payment will also turn out to be lower when you consolidate than they were before consolidation.
Your credit score also stands to benefit from consolidation. If you have too many lines of credit open, it begins to negatively impact your credit score. By closing some of these lines you should see an improvement in your score. However, be careful not to close too many. One of the essential elements of your credit score is the percentage of your credit line that is in use. This fraction counts for thirty percent of your score and if you have cards that are almost maxed out, your credit score can go down by several hundred points.
Most people consolidate their credit card debt in one of three ways.
Zero-APR Balance Transfer Offer
One of the easier ways to consolidate credit cards is to find a card with a zero-percent balance transfer offer with a credit line large enough to transfer your existing debt onto it. With a zero-percent APR, all your money is put towards paying off the principle, not the interest. Even if you can't find offers at zero-percent, still paying several percentage points less in interest should add up over the time of paying off the loan.
However, you do have to be careful of the fees that are assessed at the time of the balance transfer. Most, if not all, credit card companies charge a certain percentage, usually between three and seven percent, of the balance transferred upon putting it on your new card. If you can't pay off your balance soon, you will still save money even with these fees, but if you were close to paying off your balance you might be better off keeping your money on your old card and paying interest for a month or two. Choose wisely.
Take Out a Home Equity Loan
If you owe over $10,000 in debt, you may want to consider taking out a home equity loan. Home equity loans are loans that use the equity that you own in your house as collateral. Because these loans are secured, you can get a lower interest rate on them than you would with unsecured personal loans. But if you have bad credit you may not be able to obtain one of these loans, or the interest may be close to the interest on your credit card. You also must pay mortgage closing costs at the start of the loan, taking a few more dollars out of your pocket. Finally, be careful not to fall behind on your payments for this loan, if you do the bank will seize your home.
Debt Consolidation Personal Loan
If your accounts are already in collection, you have no property to use as collateral, or you are way, way, way in debt over your head, you may want to use the services of a debt consolidation company. These companies work with your lenders in an attempt to lower your interest rates and monthly payments. They pay your creditors directly, so each month you write them a check and they send it in to your creditors.
Do your research before entering into a contract with any of these companies however. Some may advocate not paying your bills to get a better deal, or they just may not send in your monthly payments. Either way, your credit score will be damaged by these actions. Your best bet will be to find a non-profit debt consolidation company that's well established in the field.
Always Rip Up Your Cards
I can't stress this enough, when you've taken these steps and consolidated your cards, rip up your old cards and cancel the accounts, especially if you can't control your spending. This step is important. If you cheat and don't close an account, you may end up with more debt than you started with - the old debt you consolidated and the new debt you're running up on your credit cards again.
Remember the first rule of holes - "If you find yourself in a hole, stop digging!"
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