When it comes to your finances, do you take a head-on or head-in-the-sand approach? If you identify with the latter, the good news is you’re not alone. The bad news? You’re not alone. New data suggests that when it comes to managing money, women are not as independent as you’d expect. In fact, 91 percent of women in heterosexual couples are not participating in financial decisions. But we want to change that statistic. To help you become a master of your own finances, we’re debuting a new series called The Paper Files, where we uncover tricks and tips that will help you manage your money and your future. Ready to take it head-on?
It’s easy to get yourself into money trouble—especially when you’re spending on credit cards and aren’t looking at your bills until the end of the month (and realize you can’t actually pay off the full amount… uh-oh). Many people look into how to consolidate credit card debt when they have unpaid balances on multiple accounts. To give you a snapshot of Americans’ current spending issues, a whopping 35 percent have their debt in collections. While discussing the topic of debt consolidation, we’d be doing you a major disservice if we didn’t mention that while the process of transferring debt into one account works for some, it actually just makes it worse for others.
“Most of the time, after someone consolidates their debt, the debt grows back,” warns Dave Ramsay, an American businessman and author who has personally experienced crippling debt. “Why? They still don’t have a game plan to pay cash and spend less.”
Before doing anything, it would be wise to consider a debt management plan in which you work with a credit counselor to lower your interest rates or have fees waived on your separate accounts (these experts have “ins” you won’t be able to get on your own). But if you really would like one lower payment for convenience—and don’t mind a potential hit to your credit score—then you can move onto debt consolidation. Below, find out how to consolidate credit card debt and decide which of the four options, if any, is the best fit for you.
Opt for a Balance Transfer
Basically, this option allows you to transfer over all of your credit card balances into one credit card account with a 0 percent annual percentage rate (APR). Here, you need to consider two things while making your decision: what the balance transfer fee is per credit card balance and how long you’ll have 0 percent APR (it’s typically for a specific, predetermined period).
You need to weigh the perks here. If you can pay down your balance quickly, then you don’t need low interest for a while. On the flip side, if you need more time to make payments, you might prioritize 0 percentAPR for a longer period (with higher transfer fees). Three of the top credit cards for balance transfers include Chase Slate, Barclaycard Ring Mastercard, and Citi Simplicity. Heads-up: You’ll need an impeccable credit score to get the Barclaycard Ring Mastercard.
Get a Personal Loan
This is no doubt going to cost you more money than getting a balance transfer card, especially if your credit score isn’t superb. To put things into perspective, data from the Federal Reserve shows that if you took out a two-year loan, the average interest rate would be 10 percent, compared to the 0 percent you’d get for a fixed period on a bank transfer card. We should mention that if your credit score is great, you can get a loan at around 5 percent interest, but it all depends on your particular situation.
Take out a Loan on Your Home Equity
If you’re a homeowner, another potential option would be to take out a home equity loan so your debt is consolidated with a lower interest rate over a longer period of time (about five to 15 years). In some instances, you can actually deduct the taxes you’re paying on these home equity lines of credit (HELOC) because of the mortgage interest tax deduction, which brings the interest rate down to about 3 percent to 4 percent overall. Although this sounds very tempting, it’s also a very easy way to go bankrupt and have your house taken away by the bank if you’re not able to keep up with your payments.
Borrow Against Your 401k
We’re often told that we can’t touch our 401k until we retire, but some situations may call for it. If you don’t qualify for the other types of loans, this may be your only option. Firstly, you need to realize you’re touching money you’re going to need in the future (as in you may not make up for it in the long run). Plus, it will usually mean you will need to stay with your employer for five years. The upside is that this type of loan doesn’t affect your credit score when you may want to make a big purchase in the future.