Credit card debt has a way of taking over your life. If you're struggling with debt, you're not alone. The average household with credit card debt owes more than $16,000, the highest it's been in almost a decade. With an average interest rate of 16%, it would take 14 years to pay off this typical balance with a total cost of more than $40,000.
When you are drowning in debt, it can be hard to even get by, let alone try to pay down your balance and make progress on your debt. Before you consider bankruptcy, there's another option that may save your credit and your assets.
What is Debt Consolidation?
Debt consolidation refers to basically refinancing your credit card debt. Rather than owing several companies with different minimum monthly payments, due dates, and interest rates, you will have a single loan with one monthly payment to worry about. This alone can make it easier to pay off your balance, but credit card consolidation can also give you a lower interest rate.
It's important to note that there are two broad types of debt consolidation: secured and unsecured. Secured loans will require collateral like your home or car, which will be at risk if you fall behind on payments. Unsecured debt consolidation is usually the best option if you qualify. It's rarely worth the risk to convert unsecured debt (like credit cards) into secured debt.
Ways to Consolidate Debt
There are several ways to consolidate debt. Each option comes with advantages and disadvantages.
The first option is a personal loan. With this option, you can consolidate all types of debts into one loan. This includes credit card debt, medical debt, auto loan debt, and even student loans. A personal loan can be secured or unsecured, depending on your credit rating. If you have a high credit card balance, a personal loan is likely the best way to consolidate all of your debts into one.
Another option is transferring your balance to a balance transfer credit card. These credit cards usually have a 0% or low-interest introductory APR to save money and get a head start on paying off the balance. The downside to a balance transfer credit card is it can come with hidden fees. You will also be limited by your new credit limit. In most cases, you cannot transfer balances that exceed $10,000 to $15,000.
Some people choose to consolidate debt with a home equity loan or HELOC. This option comes with big advantages: interest rates on HELOCs and equity loans are usually very low and the interest is likely tax deductible. The downside is you are taking a big risk. Your home will be collateral on the loan, which means you can actually face foreclosure if you can't pay what was essentially unsecured credit card debt. If the value of your home drops, you can also owe more than the home is worth. These loans also have long repayment terms which means much higher interest charges in the long-run.
A final popular option is working with a debt consolidation company. If you choose this option, make sure you are working with a reputable company. The FTC offers a debt consolidation guide with red flags that indicate the company is not legitimate.
Is Debt Consolidation a Good Idea?
If you are struggling to pay your debt and you feel like you can't get ahead, debt consolidation is likely a good option to avoid bankruptcy. There are many ways to consolidate debt to fit your needs, credit rating, and goals. Make sure you choose the option that will work best for your situation.