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How to Consolidate Debt | chime

The great thing about debt consolidation is that you have more than one way to do it. The two main routes to debt consolidation are:

  1. Transfer a balance to a credit card with an APR of 0%.
  2. Combining balances with a debt consolidation loan.

In addition to the above options, you can also take out a home equity loan or 401(k) loan — although these methods are far riskier.

What is most important is choosing the option that suits you and your budget. When comparing consolidation methods, it’s also helpful to know how they work and what the benefits are, especially when it comes to your credit score.

Read on to learn more about balance transfers, debt consolidation loans, and other types of debt management programs.

Credit card balance transfer

A balance transfer, also known as a credit card refinance, means moving the balance you owe from one credit card to another credit card. Ideally, you’d move the balance to a card with a low or 0% APR.

A Credit card transfer can be a good way to manage debt consolidation if your credit rating allows you to qualify for the best referral promotions. Additionally, if you get a 0% interest rate for several months, you may have enough time to pay off your debt in full with no interest.

When comparing balance transfer credit card offers, it’s helpful to check your credit history so you know which cards are most likely to qualify you. Then check the terms of the promotional offer so you know what the APR is and how long you can enjoy an interest-free period.

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private loan

A personal loan is a loan that can meet various financial needs, including debt consolidation. Personal loans are offered by banks, credit unions, and online lenders.

Each personal loan lender differs in how much they will let you borrow and what interest rates and fees they charge. The interest rates you qualify for largely depend on your credit rating and income.

Some personal loans are unsecured. That means you don’t have to give the lender any collateral to qualify. A secured personal loan, on the other hand, requires you to provide some form of security in exchange for a loan – e.g. B. a car letter or money in your savings account. You would get your collateral back once the loan is paid off.

home loan

If you are a homeowner and have equity in your home, you may be able to take out one home loan or line of credit (HELOC) to get cash and use it for your other debts.

There are two types of home equity loans: a fixed rate lump sum option and a HELOC, which acts like a variable rate credit card.

Because the loans are secured by your home, you’re likely to get a lower interest rate than you would with a personal loan or a balance transfer credit card. However, you can also lose your home if you don’t keep up with the payments.

401(k) loans

If you participate in an employer-funded retirement account such as a 401(k), you can borrow that money in the form of a loan and use the funds to pay down your debt. There’s no credit check, the interest rate is low, and the repayment is deducted from your paycheck.

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However, once you take the money out of your 401(k), you won’t lose anything compound interest You could have earned if you let your account grow. And if you can’t make your payments, the amount you withdraw could be taxable, and on top of that you may have to pay a prepayment penalty.

debt management programs

Debt management plans or debt management programs are not loans. These programs help you consolidate and pay off your debt by working with your creditors on your behalf.

How a debt management plan works:

  • You give the debt management company information about your creditors, including the amounts owed and the minimum monthly payment.
  • Debt management negotiates new payment terms with your creditors.
  • You make a single payment to the debt management company each month.
  • The debt management company then splits this payment to pay each of your creditors.
  • The process is repeated every month until your debt is paid off.

A debt management program can be a good choice if you don’t want to borrow or transfer credit card balances. Your debt management company can help you combine multiple payments into one. They may even be able to negotiate a lower interest rate or waiver of certain fees.

The downside is that debt consolidation services may only apply to credit card debt. So if you have student loans or other debt to consolidate, you may not be able to include them in the plan.