What’s the smartest way to consolidate debt?

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What’s the smartest way to consolidate debt?

Here’s what you need to know.

Consolidate debt

If you have credit card debt, you are not alone. The smartest strategy to pay off credit card debt is credit card consolidation. When you consolidate credit card debt, you are combining your existing credit card debt into one loan with a lower interest rate. With a lower interest rate, you can save money each month and pay off your debt faster.

Many factors guide your decision to consolidate your credit card debt, including:

  • the amount of credit card debt
  • the interest rate
  • your credit rating
  • if you have equity in your home

The most common reason for consolidating credit cards is to pay off debt. Additionally, credit card consolidation can be used interchangeably with “refinance credit cards”.


 

3 ways to consolidate credit card debt

Here are 3 popular ways to consolidate your credit card debt:

  1. Consolidate with a personal loan
  2. Get a 0% APR credit card
  3. Tap home equity

Let’s explore each option.

1. Consolidate with a personal loan

  • A personal loan is an unsecured loan with a fixed monthly rate that helps you pay off your credit card.
  • The goal is to earn an interest rate that is lower than the interest rate on your credit cards. Personal loans can start as low as 5.99% APR.
  • With a fixed interest rate, your monthly payment never changes. In comparison, credit cards have variable interest rates, which can change over time.
  • Your credit score may increase because a personal loan is considered an installment loan.
  • Personal loans may have one-time origination fees, which are included in the APR of the loan.
  • To qualify for a personal loan, you generally need good to excellent credit. With many lenders, you can apply directly online.

This credit card repayment calculator shows you how much you can save when you consolidate your credit card debt with a personal loan.


2. Get a 0% APR credit card

  • A 0% APR credit card is a useful tool for consolidating high interest credit card debt.
  • A 0% APR credit card is available if your credit is good to excellent.
  • You can transfer your credit card balance to a new 0% APR rate credit card.
  • As the name suggests, a 0% APR credit means that you don’t earn any new interest on your credit card balance for a predetermined period such as 12-18 months.
  • Some 0% APR credit cards also offer 0% APR on new purchases during the same period.
  • After the 0% APR period ends, interest will accrue on your balance and regular monthly payments will begin.
  • Some 0% APR credit cards charge a small fee for a balance transfer, but some 0% APR cards do not have a balance transfer fee.

3. Tap the home equity

  • A third option is to tap the equity in your home and then use the proceeds to pay off the high interest credit card debt.
  • Typically, the interest rate on a home equity loan is lower than the interest rate on your credit card debt.
  • To use this strategy, you must own a home and have sufficient equity in your home.
  • You can use a home equity loan or a home equity line of credit.
  • Unlike a personal loan, this is a secured loan, which means you could lose your home if you default on your payment.

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