Help With Credit Card Debt Consolidation

Credit card consolidation is a common way of helping people meet their financial goals.

Credit cards have become a normal way of life, as many people use them to pay for everyday items such as clothing, gasoline and groceries. As more people use credit cards, some people have found that their current credit cards simply do not meet their financial goals and needs. They often consolidate their multiple credit cards to lower their interest rates and minimum payments. There are different ways to consolidate credit card debt, and each method has its own pros and cons.

Debt Consolidation Loan

Debt consolidation loans are loans that are made to individuals to consolidate their credit card debt into one monthly payment. These loans are sometimes unsecured, but are often secured with some kind of collateral. Debt consolidation loans are offered by many types of financial institutions, including traditional banks, credit unions and loan companies. These loans help consumers simplify their debt, but often have high interest rates and punitive late fees.

Credit Card Balance Transfers

People who hold multiple credit cards are often offered new credit cards with lower rates than their current cards. In addition to the lower credit card rates, many of these new credit card offers have no or low balance transfer fees. Although the cost of consolidating credit card debt with these new credit card offers may be a good idea in theory, people should still be cognizant of the fact that they are still in debt to a credit card company who will often charge high late fees or over-limit fees if the account is paid late or the credit limit is exceeded.

Home Equity Line of Credit

A home equity line of credit is a credit instrument that is secured by the equity of the home of the funds recipient. Home equity credit lines are instrumental in helping people pay off their high interest credit cards with a line of credit that is often tied to the prime rate. The prime rate is published daily in the Wall Street Journal and is tied to the federal funds rate, which is the rate that banks are charged for borrowing money. Home equity credit lines, however, place a second mortgage on the home of the funds recipient and reduces the ownership level that the homeowner has in his home since he has financed his credit card consolidation using the equity he has accumulated. Homeowners who consolidate their credit cards using a home equity line of credit must be sure to pay their monthly payment, as non-payment will result in potential foreclosure of the home as a result of loan default.

Credit Card Debt Reduction

An alternative to credit card consolidation is to pay off each credit card in full at its current rate. According to personal finance guru Dave Ramsey, people in credit card debt should pay off their credit cards, starting with the card with the lowest balance and ending with the card with the highest balance. This method of repayment is called the Debt Snowball Plan. The snowball plan also stipulates that the credit card holder should keep paying the amounts from the paid off accounts, but apply them to the account that is next to be paid in full. This process accelerates the time in which the account will be paid off. The Dave Ramsey plan advocates that people should not use their credit cards after they have been paid off, encouraging people to pay for things in full with cash.

References

• Federal Trade Commission: Knee Deep in Debt
• American Banking & Market News: Consolidate Your Credit Card Debt With A Balance Transfer Credit Card
• Bank Rate: Wall Street Prime Rate
• Federal Reserve Board: What is a Home Equity Line of Credit
• Dave Ramsey: Get Out of Debt with the Debt Snowball Plan