Debt consolidation is a great way to reduce your debt and pay it off faster. It can often give you a single, lower monthly payment that’s easier to manage and pay on-time. Those on-time payments can even improve your credit over time. There are a few different options to consider when consolidating your debt – credit cards, personal loans and home equity loans – and your unique situation will determine which one is best for you.

 

Credit Cards

If you have available credit on one of your existing cards with a low rate or can qualify for a new low-interest credit card, you have the option to transfer your balances from other credit cards and loans over to that card.

Pros:

• As you pay down your credit card, you’ll have more credit available if you need it in an emergency.
• Many financial institutions have a special balance transfer rate. At Credit Human, your balance transfer rate stays the same until you pay off the balance you transferred.

Cons:

• Credit cards generally have a higher rate than loans.
• Closing your existing credit cards once you transfer those balances can negatively impact your credit, at least in the short term. That may still be a worthwhile trade-off to keep you from being tempted to charge up those credit cards again.

 

Personal Loans

Applying for a personal loan is another option to enable you to pay off other higher-interest debts.

Pros:

• Personal loans generally have lower rates than credit cards.
• They offer a single, fixed payment schedule for a predetermined length of time.

Cons:

• If you have a high debt-to-income ratio or a lower credit score you may not qualify for a personal loan, at least not without a co-signer.
• A personal loan does not leave you with an available line of credit to use for emergencies once it is paid off.

 

Line of Credit

A line of credit (LOC) is like a hybrid between credit cards and personal loans that allows you to borrow at a low rate while also being able to reuse the credit as you pay it back.

Pros:

• Best used when you are unsure of the total amount of money needed. You can use as much or as little as you need to pay off your other debts and use it for other opportunities such as a home project.
• An LOC does not require collateral like a home equity loan and there are no fees for cash advances like a credit card.

Cons:

• Payments are not fixed and usually require minimum monthly payments based on a percentage of the total amount borrowed.
• Most financial institutions have variable rates on their LOC. However, it is important to note that at Credit Human we keep our LOC rates fixed – which is a plus.

 

Home Equity Loan

If you already have a home loan with available equity, you can apply for a home equity loan. This allows you to use the equity in your home to pay off your outstanding debt.
 
Pros:

• Home equity loans generally have the lowest rate option compared to credit cards and personal loans.
• Loan terms can go up to 15 years, making the payment more manageable.

Cons:

• You can only qualify for a loan if you have enough equity in your home. In Texas for example, borrowers can't owe more than 80 percent of the market value of their home on their mortgage and home equity loans combined.
• Qualifying for a home equity loan can be more difficult depending on the current state of your credit.
• If you miss payments you run the risk of losing your home.

Regardless of the option you choose, the best approach is to take advantage of this opportunity to make a commitment to limiting the amount of high-interest debt you take on in the future. That may include closing those higher-interest credit cards, as well as changing your spending behavior. Spending thoughtfully and putting more money into savings can help you build the slack you need to handle emergencies and reach your financial goals.

Stop by one of our Financial Health Centers or make an appointment with a specialist so we can discuss your unique situation and explore the options best suited to your needs.

 

Other Resources

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Rework Bills and Manage Debt

Tips to Communicate with Creditors