According to data from Experian, the average American has just over $5,000 in credit card debt. With average credit card interest rates soaring to 20.16% in the third week of January, carrying a balance on your credit card can come with a hefty price tag. And since the Federal Reserve plans to raise interest rates even higher in 2023, now is an opportune time to look for ways to reduce your debt load.
There are many ways to consolidate your debt into one easy payment so you can enjoy lower interest rates, faster payoffs, and simpler ways to make your payments on time every single month.
What Is Debt Consolidation?
Debt consolidation is a process aimed at combining your current debt, resulting in one monthly payment. Not only does this make your life easier, but it also has the potential to lower your interest rates and help you pay off debt faster. A good debt consolidation plan will save you both time and money.
There are multiple ways to consolidate your debt. The best debt consolidation method for you depends on:
- The amount of debt you carry
- Your current interest rates
- The interest rate offered by the debt consolidation Your credit score and creditworthiness
- Whether you have home equity you can draw on
Evaluating these factors can help you determine which debt consolidation method is best for your situation.
Whichever method you choose, it’s important to remember that a debt consolidation strategy should you help you get out of high-interest debt for good. As you research debt consolidation methods, it’s equally important to create a plan to prevent yourself from falling back into debt.
Five Ways to Tackle Your Debt
All debt consolidation methods have one thing in common: They offer a means to take multiple (higher-rate) payments and combine them into one single payment. Below are 5 top ways to consolidate your credit card debt:
- Balance transfer credit card
- Personal loan
- Home equity loan or home equity line of credit (HELOC)
- 401(k) loan
- Debt management program
Balance Transfer Credit Card
A balance transfer card, also known as credit card refinancing, is one of the most common ways borrowers consolidate their debt. Here’s how it works: You apply for a new credit card that is offering an introductory promotional APR The promotion period typically lasts for 12 to 18 months.
Once you’ve been approved for the card, you can roll over — or transfer — the balances from existing accounts to the new one. Then, you make payments towards the cumulative balance, oftentimes paying little or no interest for the duration of the promotional period. Some balance transfer cards may even allow you to roll over non-credit card debt such as student loans or personal loans.
Most balance transfer cards charge a transfer fee for each balance you roll over, typically between 3% to 5% of the balance you’re transferring. At Lafayette Federal, we only charge 3% of each balance you’re transferring (or $30 per transfer, whichever is higher).
Because the APR will return to a standard interest rate at the end of the introductory period, you should determine whether or not it’s realistic for you to pay off the entirety of your debt (or a good majority of it) within this timeframe. If it isn’t, you may want to consider one of the options below.
A personal loan can be another good option to consolidate your debt. You can apply for a personal loan from your financial institution.
Once you’ve been approved for a personal loan, you use the proceeds of the loan to pay off the balances on all your other existing debt. Now you only have one debt payment to make — and it’s often at a much lower interest rate than the rates offered on credit cards.
Credit unions are typically able to offer lower APRs and more flexible loan terms than banks and other online lenders. Federal credit unions (such as Lafayette Federal) do not charge more than 18% APR on personal loans. In fact, we offer Signature Loans with an APR as low as 8.99%.
As you’re researching personal loan options, pay close attention to the loan terms and fees. Most creditors charge an origination fee on personal loans. You should ensure the origination fee doesn’t outweigh the savings you’ll gain from obtaining a lower interest rate. You should also consider whether or not a particular loan allows for early repayment. Some personal loans assess penalties for early repayment.
Home Equity Loan or Home Equity Line of Credit (HELOC)
A home equity loan or home equity line of credit (HELOC) is a debt consolidation option for homeowners who have built a significant amount of equity in their homes.
A home equity loan provides the borrower with a lump sum payment that can be used to pay off the balances on credit cards, student loans, car payments, and other sources of debt. Home equity loans come with a fixed interest rate, so you know what your payment will be every month.
A HELOC provides you with a line of credit that you can draw from as needed. Much like a credit card, HELOCs come with variable interest rates that fluctuate as often as every month according to a particular institution’s index rate (most financial institutions use an index known as the prime rate).
Both home equity loans and HELOCs can be great options to consolidate your debt. Because they’re secured by your home, home equity loans and lines of credit are more likely to come with lower interest rates than balance transfer credit cards and personal loans. At Lafayette Federal, we offer home equity loans and lines of credit up to $500,000 with affordable payment terms up to 30 years. We do not charge annual fees or prepayment penalties.
A 401(k) loan may be another debt consolidation option, although not all employer retirement programs allow you to take a loan from your retirement account. If your employer does allow this, you may be able to withdraw up to $50,000 or half of your vested account balance (whichever is lower). Once you withdraw the funds, you have 5 years to repay the loan.
If you lose or leave your job before the loan is repaid, you only have until the next time you file taxes to repay the full loan amount. Failure to repay the full loan amount can result in significant early withdrawal penalties if you’re under 55 at the time of job loss.
A 401(k) loan isn’t always a good first option, as it reduces your retirement savings balance and prevents you from earning interest on that money. But it can be a good option in some cases, especially if a low credit score prevents you from accessing other debt consolidation options.
The interest you pay on a 401(k) loan is interest you pay back into your retirement account. So while most 401(k) loan plans charge an interest rate concurrent with the prime rate plus 1%, you’re at least paying that interest back to yourself.
Debt Management Plan
Finally, a debt management plan is another option borrowers can use to help them get back on track financially. While a debt management program isn’t technically debt consolidation, it’s similar in that once you sign up for a debt management plan, your payments are all rolled into one.
By enrolling in a debt management program, you’re paired with a credit counselor who works with your creditors to reduce your interest rates in exchange for enrolling in the plan. Although you will likely have to pay a startup fee and a monthly fee for the service, the reduction in interest rates and the education you can gain from your credit counselor may be invaluable. As a bonus, any calls you’ve been receiving from debt collection agencies will stop.
However, enrolling in a debt management program means that you’ll likely be required to close all your existing credit card accounts. For chronic overspenders who have a hard time controlling their spending, this may be a good thing. But it’s not right for everyone.
To explore a debt management program, visit the National Foundation for Credit Counseling (NFCC). The NFCC has a list of nonprofit credit counseling services that may be able to help you with a debt management plan.
Determine the Best Debt Consolidation Strategy for Your Situation
To determine the best strategy to consolidate your debt, start by making a list of your current debts. Include the debt balances, the minimum monthly payments, the interest rates, and the number of payments you have left for each credit account you have open. Determine how much you would end up paying in full (including the principal and interest) on each account if you kept your payments separate.
Once you know this information, you’re in a better position to compare debt consolidation options. Research average interest rates from a few different options you know might be available to you based on your credit history and resources. The data should give you an idea of whether a loan consolidation method will save you time and money.
If you’re deciding between multiple debt consolidation methods, compare the two side-by-side. For example, imagine you’re deciding between a balance transfer credit card and a personal loan. Find out the “start-up” fees of each option (e.g., the balance transfer fee, the loan origination fee). You should also compare the APRs, repayment terms, and total interest you’ll pay over the life of the loan for each option you’re considering.
Consolidate Your Debt at Lafayette Federal
At Lafayette Federal, we offer solutions to our members who are looking for improve their financial wellness. From balance transfer cards to personal loans to home equity loans and HELOCs, we work hard to ensure our members can find a debt consolidation best suited for them. Contact us to get started.