On the surface, the idea of acquiring debt to pay off debt might seem a bit backwards to Californians. However, consolidating all your high interest credit card debt into one vehicle can help you pay it off faster and for less money. The key is to find the right way to consolidate credit card debt for you. To help you figure this out, we’ll look at the most common options, their advantages, and their potential pitfalls.
What is Credit Card Debt Consolidation?
Essentially, bundling all your credit card debt into one obligation is the essence of credit card debt consolidation in California.
Combining all of your outstanding balances into a single debt instrument can lower your monthly payments, reduce your overall interest rate and help you pay the debts off more quickly.
The primary tools people use for this purpose are balance transfer credit cards, debt consolidation loans, home equity loans and home equity lines of credit.
Balance Transfer Credit Cards
These can be the least costly or the costliest means of consolidating debt. The difference lies in how you manage repayment of the consolidation. Most balance transfer cards come with a limited time offer of an extremely low interest rate. Some even offer a grace period with no interest charges at all.
The key to making this the most affordable means of eradicating credit card debt is being certain you can pay off the entire transferred balance before the window closes on that introductory offer. Otherwise, a very high interest rate will come into effect on the unpaid balance.
Further, some transfer card agreements stipulate the imposition of interest charges going all the way back to the date of the transfer — on the entire transferred balance —if the transferred amount isn’t paid in full before that window slams shut.
Debt Consolidation Loans/Personal Loans
These unsecured loans are capable of consuming sizable amounts of debt — assuming your credit score indicates you’re an acceptable risk to a lender. What’s more, the higher your credit score, the better the interest rate for which you’ll qualify.
This translates into spending less money overall to retire your credit card debt. Generally, the interest rate on these loans is far lower than what you’ll find in credit card agreements, so you’ll save money there.
Further, by consolidating many monthly bills into just one, you’ll have a better shot at closing out your accounts sooner. This will garner additional savings. The key here, according to the experts at Freedom Debt Relief, is conducting the consolidation before you experience debilitating credit score issues.
Home Equity Loans and Lines of Credit
This can be the least costly means of consolidating debt overall — if you own a home. However, there is a big gotcha embedded within this strategy. You’ll trade unsecured credit card debt for a secured loan against your home.
This means that if things go awry, the lender could force you to sell your home to repay the loan. Worst-case scenario, you could lose your home altogether and completely wreck your credit history.
This would make getting another home somewhat difficult.
Judgment and Discipline are Key
It is imperative to remember that consolidating debt does not eradicate debt. You still owe the money. Meanwhile, all the credit cards from which the debt was transferred will have zero balances. Strong is the consumer who can resist that siren call when the urge to shop hits.
Thing is, give in to it and you’ll be burrowing yourself even farther into a warren of debt. Except, this time, you won’t have consolidation as a position to which you can retreat.
The right way to consolidate credit card debt is to figure out what happened to land you so deeply in debt and take steps to ensure it doesn’t happen again. Then, consider the upsides and downsides of each approach to figure out which one you can handle as easily as possible.
Once you’ve decided, follow through with it until the consolidation debt is paid off—without incurring additional debt while you’re doing so.