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How to Consolidate Credit Card Debt

If you’re drowning in a sea of credit card debt, a consolidation loan to pay off your cards and give you a single — usually lower — monthly payment, may be an answer. But before you decide to get a consolidation loan, it’s worth noting that more than two-thirds of consumers who obtain this type of loan max out their credit cards again within two or three years, resulting in twice the debt they had in the first place.

How credit card debt consolidation works

The purpose of a debt consolidation loan is to pay off all of your credit card debt. Generally, these loans are secured through property such as your home. The interest on these loans is usually lower than credit card interest and the monthly payment should be lower than the combined payments on your cards. However, since these loans come with ten to 30 year payment schedules, you need to be sure that you won’t pay more interest in the long run than if you simply paid down your credit cards.

The two most common types of credit card consolidation loans are:

Second mortgage/home equity loans

These loans are secured by using your home as collateral. Your credit cards will be paid off, and you may qualify for tax breaks, but the downside is that if you default on the loan, you could lose your home. Research all the details of the loan very carefully before making your decision.

Credit cards with low or zero-percent interest rates

You’ve probably seen many of these offers in your mail or on the Internet. They offer very low or zero-percent interest on transferred balances from other credit cards. Be aware that the low interest rates are usually for a limited time, so check how long the initial rate will last, and how much it will increase when it expires. Also bear in mind that if you are late on just one payment, most credit card companies will raise the interest rate significantly. Again, do some research.

Credit card debt consolidation loans can be helpful for people struggling with their monthly credit card payment, but it’s vital to understand what you’re agreeing to before you sign the dotted line.