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4 Ways to Consolidate High Interest Credit Card Debt

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By Eva Norlyk Smith, Ph.D.
May 22, 2009

If you struggle with high interest credit card debt, you’re not alone. The #1 New Year’s Resolution for more than half of Americans two years running has been to pay off their debt, according to a survey by Franklin Covey Company.

When it comes to getting rid of high interest credit card debt, one way to get ahead is to reduce the overall interest you pay on your debt. Cutting your overall interest expense will save you money, which you in turn can use to pay off your debt faster. There are several ways to lower the interest rate on your credit cards. If these don’t work for you, try to consolidate high interest credit card debt into low interest loans. Here are the four most common approaches to debt consolidation and the pros and cons of each.

1. Transfer balances to a 0% APR card. Take out a 0% APR balance transfer to pay down high interest credit card debt and then transfer the balance to a new 0% APR card when the previous 0% offer expires. Rinse and repeat.

Pros: If it works, it’s a sweet deal.
Cons: It’s easy to get caught, particularly as credit card companies are tightening their lending criteria. If you don’t get approved for a new 0% APR deal before the previous balance transfer rate expires, you’ll be stuck with a balance racking up interest charges that may be higher than what you currently pay.

2. Apply for a low interest credit card. If you have good credit, you might be able to transfer high interest credit card balances to a card charging a lower interest. The obvious way to do this, of course, is to apply for a low interest credit card.

Pros: This is a great strategy if your credit is excellent and you are able to get approved for the best low interest credit card offers.
Cons: Many cards offer teaser rates that promise you interest rates as low as e.g. 7.99%. Unless you have great credit, you often end up either a low initial credit line or a much higher rate than the teaser rate.

Instead, look for low APR balance transfer offers on your existing credit cards, with a low interest for the life of the loan. Some card companies offer this more frequently than others, so call your credit card issuers to see what balance transfer offers are available to you.

3. Open a home equity line of credit. If you have equity in your house and good credit, this old standby can be a great choice. If the credit card crisis has a silver lining, it is that interest rates have reached historic lows, so it makes more sense than ever to take out a home equity line of credit to pay off your credit cards.

Pros: A home equity line of credit will not only help you pay off high interest credit card debt, it also lowers your taxes because the interest on a home equity line of credit is tax deductible.
Cons: You turn unsecured debt into secured debt, and that debt is secured by your house! If you don’t meet your monthly obligations, you could lose your house.

4. Refinance your mortgage. Another common way to free up money to pay off high interest credit card debt is to refinance your mortgage with a cash-out and use the extra cash to pay off your credit card debt. While the costs of refinancing are higher than for a home equity line of credit, the interest rate will be quite a bit lower.

Pros: Your monthly payments on the extra debt will be lower than for a home equity line of credit. You can use the difference to pay down your credit cards faster.
Cons: Refinancing can easily cost more than $2,000. Make sure that your savings in credit card interest costs makes that expense worthwhile.