Credit Card Consolidation Loans vs. Other Forms of Debt Consolidation
Consolidating debts generally has two goals: to make payments simpler and to save money on interest. But there are a few specific methods borrowers can use to consolidate, each with its own host of pros and cons. One method involves taking out a personal loan for the express purpose of using it to pay off other debts. However, this is certainly not the only way to streamline debts and reduce interest charges on what you owe.
Here’s how credit card consolidation loans compare to other forms of consolidation.
What to Know About Credit Card Debt Consolidation Loans
The simplest way to think about using a consolidation loan is taking out new debt to wipe out existing obligations, typically those with higher-than-average interest rates, such as credit cards.
According to the experts at NerdWallet, some of the main benefits of using a loan include:
- Loan repayments have consistent interest rates and monthly installments, unlike credit card debt.
- Borrowers with a strong credit history can often qualify for competitive interest rates.
- There are a number of sources for consolidation loan products, including banks, credit unions and online companies.
Which, depends heavily on their credit scores.
Someone with a high credit score (720 or above) who applies for Bills.com credit card consolidation in the form of a loan is more likely to qualify for lower interest rates, while an applicant with average credit is more likely to encounter higher interest rates. Borrowers with poor credit due to missed payments and high credit usage may even have a harder time getting approved at all for a consolidation loan. Lenders will also examine factors like current income and debt levels to assess a borrowers’ risk before making a decision and deciding interest rates.
What to Know About Other Forms of Debt Consolidation
What other forms of consolidation are available to borrowers looking to streamline and save?
Balance Transfer Credit Cards
High average interest rates make credit card balances notoriously difficult to pay down. Transferring one or more balances to a new card with a promotional 0% interest rate can essentially buy time for borrowers, giving them a window in which to aggressively pay down debts without amassing interest.
The key to making a balance transfer count is factoring in the transfer fee (usually between 3% and 5%), and making sure you can pay off most, if not all, of the balance within the promotional period, after which interest rates rise.
Unlike debt consolidation loans, which vary in amount, depending on the lender, there is generally a cap on the maximum amount borrowers can transfer. Since it’s important to pay off as much of your debt as possible during the promotional period, it generally only makes sense to use a balance transfer for debt loads of several thousand dollars, tops.
Debt Management Program (DMP)
Borrowers who want or need help organizing and paying their debts may benefit from enrolling in debt management through a credit counselor. The agency will take over making payments to creditors, and may be able to negotiate better terms on interest and fees. Your job will be to keep up with a monthly agency payments.
As with any consolidation method, there are associated fees to calculate in before deciding whether a DMP will actually help you save.
Using Home Equity
Homeowners may be able to take out a low-interest loan against their equity that they can repay in installments over the long term. Be aware this tactic does involve swapping unsecured, albeit more expensive, debts against a secured one — putting your home at risk if you default.
To find the best fit, it’s worth weighing credit card consolidation loans against these other strategies whenever you’re thinking about consolidating.