Credit Card Debt Consolidation - Four Ways to Simplify Your Financial Life

If you've lost your job, experienced a serious illness, or faced another unexpected event or major expense and found yourself over your head in credit card debt, you may want to consolidate your debts so that you can make just one monthly payment, instead of several. This makes it easier to stay on top of your bills, and since even one late payment can hurt your credit, consolidating your debts before running into problems can be a good idea. But how should you go about consolidating your credit card debts? Here are four options, one of which should be right for you.

Eliminate Credit Card Debt with a Home Equity Loan

If you are a homeowner with equity in your property, then a home equity loan is probably the best way for you to consolidate your credit card debt. Since home equity loans are secured by the value of your house, interest rates are typically much lower than unsecured debts, especially credit card debt.

Home equity loans work like this: Let's say that you bought a home for $200,000 nine years ago, and you've managed to pay off another $15,000, leaving you with a mortgage balance of $185,000. The good news is that property values have appreciated in your area, and your home is now worth $240,000. This means you have $65,000 in equity ($240,000 market value - $185,000 mortgage balance). So long as you have sufficient income to pay the monthly payments, you should be able to get a home equity loan for at least a large portion of your equity, although your credit score will have a major impact on the interest rate you're offered. If you had just $10,000 in credit card debt, getting a loan for this amount would probably not be difficult, and your interest rate of maybe 8% would sure beat the 14-20% that most credit cards charge.

Credit Card Debt Consolidation Loans

If you don't have sufficient equity in your home (or you don't own one), you can apply for an unsecured debt consolidation loan. The problem with these loans is that your credit history will be of much more importance, and since they're not secured, the interest rate you'll pay will be significantly higher than what you would pay with a home equity loan. Still, particularly if you have above-average credit, you can expect to pay a lower rate than you do with your credit cards, so a debt consolidation loan may be a good idea.

Transfer Your Credit Card Balances

The best option of all, if feasible, is to transfer your existing credit card balances to a new credit card with a low, preferably 0%, introductory rate. Your monthly minimum payment will be much lower, and if you're able, you should pay in excess of the minimum (the sum of your previous payments, if possible, would be best), so that your balance can erode as much as possible before the introductory rate expires.

The problem with this solution is that you may not be able to qualify for a credit card with a sufficient credit allowance to cover all of your existing credit card debts. Also, if you apply for multiple cards within a short period of time, you're more likely to get declined. Finally, many credit card companies now charge a higher interest rate on balance transfers, even during the introductory period - so be sure to read the fine print! Transferring your balances to a new card or cards is the best, least expensive solution to consolidating your credit card debt, but for most people it's the least feasible.

Debt Consolidation Services for Credit Card Debt

The fourth option for people who want to consolidate their credit card debt is to seek outside help from a debt consolidation service. These companies will work with your creditors to get them to reduce your interest rates and minimum payments, and to synchronize the due dates of your bills. Then, instead of paying each of your creditors directly, you pay the debt consolidation service - which normally takes a fee.

The real downside of using a debt consolidation service is that you normally are forbidden from using your credit cards as you pay them down. On a more positive note, debt consolidation does not hurt your credit so long as you stay current with your debt consolidation plan. This is, however, a step that should only be taken by people who are really in trouble or feel that they are headed in that direction. The important thing is to seek out help before it's too late - the new bankruptcy laws have made it more difficult, if not impossible, for people to discharge their debts, so a debt consolidation plan may be the easiest way out of overwhelming credit card debt.