More people have more access to credit card and it means credit card debt is growing. Based on the case in the US, the average household with debt carries $15,762 in credit card debt. Furthermore, the average interest rate is 13.70%, which means American families could pay more than $2,000 of interest over the next year if they make only the minimum payment.
One way to get out of debt faster is by using a debt consolidation loan. Debt consolidation is combining several unsecured debts, namely credit cards, medical bills, personal loans, payday loans, etc. into one bill. It is a process of combining multiple debts from credit cards, high-interest loans, and other bills into one monthly payment. So instead of having to write checks to 5–10 creditors every month, you consolidate bills into one payment and write one check. This will assist reduces mistakes that result in penalties like incorrect amount or late payments. In addition to that, debt consolidation solutions may lower your interest rate, which can assist in saving money on interest, lowering monthly payments, and paying down debt faster. Debt consolidation is not an immediate fix, but rather long-term financial strategies to assist you to get out of debt.
There are three popular ways to consolidate your credit card debt to a lower interest rate:
Obtaining a personal loan with a low-interest rate has become increasingly easy, with the rise of marketplace lenders. Most lenders will let you shop for an interest rate without damaging your credit score. It is advisable to shop around for the best rate online at websites like MagnifyMoney or NerdWallet, where you can discover variable interest rates as low as 4.74%.
Home Equity Loans and Lines of Credit
This was one of the most common methods of consolidating credit card debt before the 2008 financial crisis. The advantage of a home equity loan is the low-interest rate and the ability to deduct the interest. However, you put your home at risk and tempt yourself with extending the term. Credit unions offer predominantly low-interest rates. You can call your local credit union, or work with a national credit union like PenFed, which offers home equity loan interest rates as low as 3.74%.
Credit Card Balance Transfers
Credit card companies offer teaser rates as low as 0% as an incentive to win new customers. A balance transfer could be the cheapest choice, only if you have an excellent credit score and not a lot of debt.
Debt consolidation may be a good strategy in for getting out from debt quickly, but there are few things that you need to be aware of.
You should reach out to a non-profit consumer credit counsellor first instead of a debt management company, especially if you are struggling to pay your credit card debt. You can visit the NFCC to find a non-profit consumer credit counsellor near you. The reason is the debt management companies will often use marketing language that makes them sound like consolidation loans but actually not. Generally, a debt management company will inquire you to begin paying them instead of the credit card companies. These companies will hold the money in an escrow account and will not pay the credit card bills. As an effect, your accounts will become delinquent. Your credit score will be harmfully impacted and collection calls will be initiated, which this is not what expected at all.
Mathematically, by consolidating your debt into a lower interest rate personal loan, you will set yourself in a much better arrangement to get out of debt faster. One must remember is that there is a huge risk to using a debt consolidation loan. The risk is once you pay off your credit cards, you will be tempted with a lot of newly available credit. It is advisable that before considering consolidation, you really need to ask yourself why you got into debt in the first place. If you got into debt because you spent too much money on credit cards, creating more spending power on your credit cards can be a risky strategy.