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Tips on Credit Card Debt Consolidation

Tips on Credit Card Debt Consolidation

Credit card debt consolidation helps a person take control of his finances by paying off the outstanding balance on the credit cards with the help of a single reduced interest loan. Here's more on this...
Aparna Iyer
Mounting credit card debt is never desirable. A person should be able to pay at least the minimum balance. Missing even a couple of payments will result in increasing the interest rate by as much as 30%. Moreover, if a person defaults on one credit card, it would increase his interest rates on all credit cards. In case a person spends more than 50% of his credit limit on a monthly basis, the credit bureaus interpret it as a serious cash flow problem, which would result in the person being unable to pay his bills on a regular basis. This would, in turn, reduce the credit score by as much as 70 points. Insurance companies use the information in credit reports while generating insurance scores. A huge credit card debt may result in them denying insurance policy renewal. Landlords may not be willing to rent an apartment to a person who is behind on his credit card payments. Credit card debt consolidation is one of the ways of repaying outstanding debt.

What is Debt Consolidation?

Debt consolidation is the process of replacing many loans with a single loan that carries a lower rate of interest. This is done through debt consolidation agencies, which negotiate with the creditors and bring down the outstanding amount, in addition to providing finances at a low interest rate to help pay off a multitude of loans. Most credit card companies are willing to work with a client, and help him consolidate his debts, rather than turning over the debts to a debt collection agency.

Consolidation of Credit Card Debts

Transferring the Credit Card Balance to Another Credit Card: A card with a lower rate of interest or one with 0% introductory APR can free up funds, which can then be used to pay the credit card debt. Transferring the balance to a credit card which carries a low rate of interest is possible only if a person has a good credit rating. For others, 0% introductory APR may help them save money on interest for a period of 3 to 6 months. Of course, after the initial 0% introductory rate, a person would be expected to pay a higher rate of interest. At this point in time, the person can try and transfer the balance to another credit card which offers 0% introductory APR. This process cannot continue indefinitely, but one can buy time and save money on interest, and try to pay off the debt.

Using the Equity on the House: A person can borrow against the built up equity on the house. Built up equity is the difference between the market value of the house and the remaining mortgage balance. This is possible only if the slump in the housing market has not resulted in a negative equity on the house. A person can borrow either a home equity loan (HEL) or a home equity line of credit (HELOC) using the built up equity. This results in converting the unsecured credit card debt to secured debt, the collateral being the house. A person should ensure that he pays the interest on HEL or HELOC, otherwise, he is at risk of losing his home.

Borrowing form 401(k): This might not be a bad option, since borrowing from 401(k) does not result in penalties. A person is expected to pay a low rate of interest, and the interest paid is credited to his 401(k) account. However, he should ensure that he pays the interest on time, since defaults are reported to the IRS, and a person would have to pay a penalty on any outstanding 401(k) loan.

Borrowing from Insurance: This is an option for people who need a loan which is less than the cash value of their policy. In case the amount of loan exceeds the cash value of the policy, the beneficiaries will not be entitled to death benefit. Hence, one should try and replenish the policy as soon as possible.

Refinancing the Mortgage: This is a good option for a person who was paying a fixed rate of interest on the mortgaged house. Such an individual will definitely benefit by refinancing the house, since interest rates have dropped significantly. Home refinancing is the process of using the same house as a collateral in order to obtain a secured loan. This loan which is provided at a lower rate of interest, can help a person consolidate credit card debt.

Credit counseling services can provide tips on debt management and help a person consolidate his debts. They are essential for a person struggling with mounting outstanding payments.