Credit cards have been up to some nasty tricks lately. They are raising interest rates with only a subtle notice, and cutting credit lines with no notice. Angry consumers are looking for ways to consolidate their debt. I have had some first-hand experience with both scenarios, which led to me canceling one credit card and moving the small remaining balance to another card. Those with three or four (or more) may look to other forms of credit card debt consolidation.
Pros and Cons of Credit Card Debt Consolidation Products
1. Social lending
Two years ago this would have probably been at the bottom of the list, if it made it at all. However, social lending organizations such as Lending Club have introduced great debt consolidation loan options. The benefits of consolidating debt with a social lending service is that you can bypass traditional bank politics to score a lower interest rate, fixed terms, predictable payments and pay off dates, and avoid many of these “gotchas” the credit card companies are currently engaged in.
2. Personal loans from small, regional banks and credit unions
Often times small, regional banks and credit unions are more willing to work with you than the larger banking institutions. Chances are you can actually walk into a branch, look a human being in the eye, explain your situation and discuss what consolidation loan opportunities might be available. Try doing that with one of the larger banking firms headquartered in New York with hundreds of branches around the country.
3. Home equity lines of credit
While there are tax advantages associated with tapping home equity for credit card debt consolidation, I would rather save this as a last resort option. Here’s why. When you secure unsecured debt using your home you are putting your primary residence, your source of shelter, at greater risk. Having a mortgaged home in this economy is risky enough, no sense piling on additional risk.
4. 401(k) loans
Borrowing from 401(k) plans used to be a popular option, back when people still had money in their 401(k). Now days few of us have enough money in our plan to consolidate debt, and even fewer of us can assume such a risk with an unstable job market. Remember, in most cases if your employment ends the 401(k) loan is due within 60 days, or you face early withdrawal penalties.
5. Family and friends
In general, I don’t like the idea of borrowing money from friends and family. It changes the relationship dynamic, and often leaves one or both parties with a bad experience. Having said that, there are times when, as a last resort, you may turn to family or friends for help in consolidating high-interest credit card debts. If you do, I suggest having a formal promissory note drawn up outlining the terms of the loan and what is expected of both parties.
Regardless of the approach to credit card debt consolidation you take, the most important thing to do is to close out the accounts of paid-off accounts once the transfers have been made. I made the mistake of leaving a couple accounts open, just in case, after I consolidated debts a few years ago. As you would expect, those debt balances began to creep up over time so then I was left with a consolidation loan and new credit card debt. This is definitely a trap you will want to avoid.