The average American household carries $15,654 of credit card debt, as revealed by NerdWallet in its recent study, “American Household Credit Card Debt Statistics: 2017“. If you’re one of the many people drowning in debt and looking for a way out, why not consider debt consolidation? Rather than making minimum payments on multiple cards, your debt can be rolled into one loan with a lower interest rate and an easy to manage payment. You won’t instantly be out of the hole, but there are options for getting back on track.
Option #1: Apply for a new loan
Taking out a loan when you’re already struggling sounds counterproductive but the purpose of the new loan is to pay off your old debt at a lower interest rate so you become debt free faster.
Start by checking out your credit score. If it’s good enough for you to qualify, get in touch with various banks to compare their terms and rates. Before you sign any paperwork, calculate the total cost of the loan including your debt and interest to make sure it’s something you can actually afford. If all goes well and you get approved, use the loan to pay off the debt on all your credit cards. Then your new lender will be the only person you’ll need to pay back each month.
Option #2: Shift your debt to a low interest credit card
Credit card companies are always sending promotions in the mail. Look for card offers with zero percent interest or low introductory rates on balance transfers. Balance transfers allow customers to move their debt from a high interest card to one with a lower rate. The rates will usually stay low for a certain period of time allowing you to save money and pay off debt quicker since you won’t have to worry about interest. Don’t let the idea of zero percent interest tempt you into buying more things. You need this new rate to pay off debt, not to acquire more.
There is a transfer fee attached that might make this option a little less appealing. The average fee is 3% of the transferred balance.
Option #3: Get professional help
Not everyone is able to get out of debt on their own and that’s okay. Debt Management Plans (DMP) allow you to work with a licensed credit counseling agency to learn how to manage your finances and become debt free in 3-5 years.
The first step is creating a budget you can live with. When you meet with your credit counselor you’ll discuss your basic necessities such as rent, utilities, living expenses and secured loans (i.e. mortgage, car and home equity) to determine how much money you can afford to put towards your debt. You will also be required to cancel your credit cards since you can’t acquire any new debt while in the program.
Credit counselors then work with creditors to try to negotiate lower interest rates and late fees. You will still owe 100% of your debt, but by eliminating the extra costs, you’ll pay it off quicker. Each month you’ll make a payment to the credit counseling organization and they’ll forward it to your creditors. Make sure to send your payments on time to avoid doing any further damage to your credit.
Agencies usually charge a one-time enrollment fee along with monthly maintenance fees for their services.