Ways To Consolidate Credit Card Debt
At a glance
There are various ways to consolidate credit card debt, whether through credit card loans, a debt-consolidation credit card, or a debt management plan.
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Having too much credit card debt can be financially devastating. Credit card debt grows faster and faster the longer it goes unpaid as fees and interest charges snowball.
However, there are ways to get out of credit card debt. One of the most common methods is to pursue credit card debt consolidation.
How To Choose The Best Credit Card Refinancing Loan
Long-term financial impact is the most important factor to consider when considering the best loan to refinance credit card debt. You dont want the solution to put you in a worse position.
Make sure you understand your financial situation how much of a monthly payment you can afford and what you hope to accomplish. Dont jump into something that may look good without researching it first. The Consumer Financial Protection Bureau and Federal Trade Commission both have tips on how to spot scams and lenders who will cost you too much money. If you have a relationship with a bank or credit union, that might be the best place to start.
Ease of applying is a great perk, but shouldnt be the top qualification. The major things to keep in mind are:
- A maximum monthly payment that can eliminate your debt.
- Fees that arent so bad they make it more expensive than its worth.
- A lower interest rate than what youre currently paying.
- Monthly payments you can afford.
Things To Consider Before Consolidating Debts With Mortgage
Before you apply for a mortgage to consolidate your debts, it is wise to think about whether or not it is possible for you. Here are some things you need to consider:
a) Do you have enough equity to borrow more money?You must understand the fact that whenever you borrow money against your mortgage, you are losing your owned home equity on that property. If your owned home equity is around 20% or the mortgage is already around or above 80% of the value of your home, it will be very difficult to borrow more money. You must own a good portion of home equity, Once you have consolidated and paid off all of your debts by using the mortgage, a major or the entire of the equity will be owned by the lender.
b) Does your mortgage deal involve any costs?You should read all the fine prints of your mortgage agreement and check the terms and conditions of your mortgage carefully.
You must ensure that you are allowed for additional borrowing. You should check for fees or administrative costs that should be added to the loan. Such additional costs may make your debt much higher.
c) Are you taking out a new loan or remortgage the existing?A new mortgage deal may involve less cost than a remortgage. There are fees and additional charges involved in remortgage such as exit fees, arrangement fees, legal and valuation costs, etc.
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The Basics Of Consolidating Debt Into A Mortgage
Debt consolidation is when you take out a new loan to pay off high-interest debts.
With a debt consolidation loan, you can combine your loans into a single mortgage payment. You only have to make one payment every month instead of tracking & paying different amounts every month.
Owning a home is a fantastic way to secure a home equity loan or a line of credit. The equity in your home is a great way to show alternative lenders that you have a strong financial resource.
This is one of the reasons why lenders, like Alpine Credits only use your home equity as proof that you can effectively pay off your debt consolidation loan.
If you are paying off debt on credit cards, it is recommended you pay off the amount and then do not spend any additional money on it unless you have the means to pay it off immediately. With a low interest rate, you will see your debt begin to disappear rather than seeing it stay at the same amount despite you making payments every month.
The Bottom Line On Consolidating Debt Into Your Mortgage
As Credit Counsellors, were often asked, can you consolidate debt into mortgage payments? The thought is that in doing so, you will reduce the overall interest you have to pay on your individual debts and free up potentially hundreds of dollars every month.
Its a win-win, right? Not so fast.
Sometimes, consolidating debt into a mortgage can cost you. But first, lets take a look at just how it works.
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Unsecured Debt Consolidation Loan
An unsecured debt consolidation loan allows you to roll all your debts into one without securing it against any asset. You’ll likely be subject to some thorough credit checks to verify you can afford the repayments.
Unsecured loans are seen as a higher risk to a lender and tend to have higher interest rates. Notably, once you begin keeping up with monthly repayments this way, it should improve your overall credit score.
Remember You Still Owe The Money
With any type of debt consolidation loan, the borrower should exercise caution and be disciplined with repayment. Thats especially true with a mortgage or home equity-backed loan, which could put your home at risk if youre unable to make payments.
Borrowers sometimes get into trouble because when debt is consolidated, their prior credit lines are usually freed up. Its possible to charge those lines to the max and be in debt trouble all over again.
Remember, consolidation does not mean your debts have been wiped out. Theyre just restructured to be more manageable. The real goal is to be debt-free a refinance or loan is just a means to that end.
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How To Choose A Consolidation Loan
Always shop around for the best terms as it will save you money. Make sure you understand all the terms and conditions of the loan and that you can afford to keep up the payments on your consolidation loan.
You should check:
- how long you’ll be making repayments and how much you’ll pay back in total
- the interest rate and whether it can change
- what the monthly repayments are and what happens if you miss one, for example, you might be charged a penalty
- any penalties or costs you’ll have to pay if you want to repay it early
- what happens if it’s secured on your home and you can’t keep up the repayments
Once you’ve arranged the loan, aim to keep your finances under tight control, for example, cut up your credit cards and don’t let the debt build up again. Be aware that the lender may put pressure on you to borrow more by extending the loan.
You’ll be encouraged to take out insurance with your loan. Make sure you’re clear about the terms, that you really need the insurance and that you’ll be able to claim on it if you need to.
Get A Balance Transfer Credit Card
A is when you open a low-APR credit card and move all your credit card balances onto that account. Doing this consolidates your debts and reduces your interest charges.
To make a balance transfer, you need to apply for a balance transfer credit card, which should either be a 0% APR credit card or another credit card with a reduced interest rate.
Many 0% APR and low-interest credit cards for balance transfers only offer low APR for an introductory period. So you want to choose a card with a long enough introductory period for you to pay off your debts.
Pros and cons of balance transfer cards
- Opening a new line of credit can improve your
- No interest at all if paid off during introductory period
- New credit card with potential perks and rewards
- Balance transfer APR, which will apply to any balance you dont pay off in the introductory period
- Only good and excellent credit holders can qualify for balance transfer credit cards
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What Are The Drawbacks To Refinancing Debt
- Debt restart: Unless youre refinancing from a 30-year mortgage to a 15-year mortgage, youre restarting your debt. Your monthly payments and interest may be lower, but you now have much longer before you own your home outright.
- Getting the best rates and terms on refinancing loans requires a strong credit history and a low debt-to-income ratio, especially for cash-out refinance loans. If you have a lot of debts and your score has taken some damage, you may struggle to find a suitable refinancing loan.
- Risk of foreclosure: Mortgages always come with the risk you lose your home. Getting too big of a refinancing loan such as a cash-out refinance may result in difficulty with repayment, which can increase your risk of defaulting and losing your home.
- Extra fees: The process of refinancing a mortgage is much the same as getting a new one, especially when it comes to closing fees. Some fees include application fees, origination fees and appraisal fees.
How To Refinance Your Mortgage
When you own real estate, specifically your home, you have equity in your home. Home equity is essentially the amount of money youve already paid towards your mortgage loan. Or, the difference between your homes value and the remaining amount of money left to pay off your mortgage. There are a few ways to realize equity in your home, and one of them is to refinance your mortgage. However, refinancing your mortgage isnt a decision you should take lightly.
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Borrow Against Your Home
If youre a homeowner, you can take out a loan against your homes equity in the form of a home equity loan or a home equity line of credit .
A home equity loan is a fixed-rate installment loan, while a HELOC is a variable-rate line of credit. Unlike many debt consolidation options, your eligibility and loan amount wont be determined by your credit score, but by your homes equity.
While home equity loans and HELOCs often come with better interest rates than other loans and lines of credit, only use this option if youre confident you can pay off your balance. Otherwise, as your home is used as collateral to secure the loan, you can lose your property if you fail to pay off your debt.
Pros and cons of borrowing against your home
- You must own a home
- Home appraisal is likely required
- The current value of your home must exceed your outstanding mortgage balance
- You risk losing your home if you default on the loan
Home Equity Line Of Credit
A HELOC can be a great alternative to a debt consolidation and mortgage refinance. By comparison, HELOCs dont require you to completely rebuild your entire mortgage. Your HELOC acts as a second mortgage and lets you borrow against your home equitys line of credit without expensive closing fees usually associated with closing on a home.
If you were hoping to pay off $10,000 in credit card debt, and your home equity was valued at $120,000 on a $360,000 loan, a HELOC could be a good idea. Thats because the cost of the loan wouldnt jeopardize your PMI and youd be paying lower interest than you are currently.
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Consolidating Credit Card Debt Could Help Simplify And Lower Your Monthly Payments As You Work To Become Debt
Consolidating credit card debt is when you combine multiple credit card balances into a single monthly payment that ideally has a lower interest rate than what youre currently paying.
But consolidating your debt takes time, and many methods require an application process to see whether youre approved first, which usually results in a hard credit inquiry that can cause your credit scores to drop a few points.
To help you decide if credit card consolidation is right for you, here are several methods to consider.
Can I Remortgage To Consolidate My Debt
If you are a homeowner and have lots of credit card bills or a loan that you need to repay, you could consider using the equity in your property and remortgaging to pay off debt. This is particularly tempting given the record-low mortgage rates currently on the market and seemingly ever-rising house prices, meaning many homeowners have plenty of equity in their property but may still be struggling with whats in their wallet.
There are barriers to attempting to remortgage with debt and it wont be an easy process. Lenders will take into account the value of your property, but of equal – and possibly more – importance is your credit rating. Lenders will use your credit file to give an indication of how well you can repay debt and, if you are already struggling to repay credit card bills or have missed payments on other loans, this may work against you in a remortgage application as it could push down your credit score. If your credit rating is too poor, this could affect the amount you can borrow against your property or the rate that you will be charged.
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You May Rack Up More Debt
Many people continue to use their credit cards after consolidating their balances into their mortgage. So now, not only are they paying more on their mortgage, but theyll also be back in the hole with credit card lenders.
Too much credit card debt can also sink the loan. In some cases, its possible to qualify if you agree to pay off your credit cards and close the accounts however, closing the accounts could potentially lower your credit score.
Of course, theres also no guarantee you’ll qualify to consolidate non-mortgage debt into your mortgage. If youre wondering, How much can I borrow against my home, every lender is different and every borrower is different. It typically depends on the value of the home, how much debt you’re looking to consolidate into your mortgage, how much equity you have in the home, and your .
So, before you follow any ads that pop up after typing in something like mortgage consolidation or consolidating debt into a mortgage in Canada, its important to do some research or even speak with a financial advisor or debt management counsellor.
Can Debt Be Added Into A New Home Loan
Even when you’re careful about managing money, emergencies or financial setbacks can leave you facing unwanted debt. The interest charges and fees many creditors charge can make it even more difficult to get your debt under control. By rolling your debt into a new home loan, you can consolidate your debts and lower your payments. Although they carry a clear benefit for borrowers, consolidation mortgages pose a higher risk for the lender and aren’t easy to come by. Available consolidation loans often carry stringent qualification requirements. If your lender allows you to include short-term debts into your home loan, however, doing so can make your financial obligations more manageable.
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% Apr Offers On Credit Cards
Many credit cards offer an introductory offer of 0% APR on balance transfers for a limited amount of time after opening the card. While they still may be subject to balance transfer fees , they often offer 0% introductory periods between twelve and eighteen months to not worry about the balance accruing any additional interest.
The Citi® Diamond Preferred® Card, for example, is an excellent option for those considering taking this route. It comes with a respectable 0% intro APR for 21 months on eligible balance transfers from the date of the first transfer and 0% intro APR for 12 months on purchases from date of account opening. After that the variable APR will be 13.74% – 23.74% based on your creditworthiness. Balance transfers must be completed within 4 months of account opening. There is a balance transfer fee of either $5 or 5% of the amount of each transfer, whichever is greater The downside is being capped at the allotted credit limit given by Citi.
Keep in mind that its recommended that you have good to excellent credit if youre considering applying for a credit card that offers a 0% introductory period.
Try Our Debt Consolidation Loan Calculator
Work out how much you’d like to borrow, with our debt consolidation loan calculator. The debt consolidation calculator results we display are based on the representative APR for the amount you enter. Your actual rates and repayments might differ and will be based on your personal circumstances, the loan amount and term.
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What Is A Homeowner Loan
A homeowner loan, which is also known as a secured loan or a second charge mortgage, is a loan that is secured against your property.
Homeowner loans can be useful if you want to borrow a large sum of money or have a less than perfect credit history. They are typically used to fund home improvements, consolidate existing debts or to fund large purchases.
A homeowner loan can be used for almost any legitimate purpose. Common purposes for people taking out homeowner loans include Debt Consolidation, Home Improvements, Car Purchase and to pay for a Wedding.