Five Steps to Consolidating Your Credit-Card Debts

Get out of debt faster by combining your credit-card balances

Millions of people are struggling to pay off their credit card balances right now. In the current economy, with many people facing unemployment and others losing their homes to foreclosure, it’s important to keep your expenses under control. If you owe money on credit cards, consolidating those debts can reduce your monthly expenditures and help get you back in the black.

When you consolidate debts, you take out a loan in the amount of your combined card balances, at a lower interest rate than you’re paying now, and the new loan proceeds to pay the cards off.  Your monthly payment on the new loan will be lower than the total you were paying on your old debts, making it easier for you to find your way out of debt. Follow this simple five-step process to get your finances back under control:

1. Add up all your credit card debts

Pull out all your recent credit-card statements and add up the total amount you owe.  Remember to include store charge-cards, too. Then add up the total monthly payments you’ve been making on your credit cards recently.

2. Calculate your monthly income and expenses

Add up your net monthly earnings and any other monthly income you receive. Next, add all your monthly expenditures – rent or mortgage payments, utilities, transportation costs, insurance, loan payments, food, entertainment, and all your other regular monthly expenses.

Most people pay a different amount on their credit cards every month. Instead of making a consistent payment in a set amount, they pay whatever they can after taking care of all their other expenses. Once you’ve figured out your monthly income and expenses, you’ll know how much on both essential and discretionary items and you’ll be in a better position to budget for paying off your credit-card debt.

3. Choose the loan that works best for you

There are several ways to borrow a lump sum that will pay off your credit-card debts and consolidate them into one monthly obligation:

Home equity loan: If you own a home with equity, your bank or mortgage company might be willing to provide a home equity loan. For instance, if they lend you $20,000, your mortgage will be increased by that amount. The great thing about using your home equity like this is that it allows you to pay off your credit-card debts at a relatively low, mortgage-interest rate rather than double-digit, credit-card rates.

Cash-out refinancing: This is another way of tapping into your home equity. You take out a new home loan that’s larger than your old one, pay off your old mortgage and use the remainder to pay off your credit cards. Although you’re likely to see an increase in your monthly mortgage payment, you might be able to keep it more or less constant by refinancing at a lower interest rate.  Either way, you’ll save money.

Personal loan: If you can’t use equity in a home to consolidate your credit card debts, you can sometimes get a personal consolidation loan. Unsecured personal loans are not generally as economical as borrowing against your home, but you’re still very likely to pay less interest than you do on your credit cards. Don’t forget that credit unions usually offer more favorable personal-loan interest rates than banks do.

4. Weigh the risks before you decide

If you’re hoping to use your house as collateral for a credit card consolidation loan, be aware that there are risks involved. If you can’t manage the new payments on your mortgage (and they’re likely to be a bit larger), you might be faced with a foreclosure.  Loss of your home is not ordinarily a risk you run by defaulting on your credit-card payments.

5. Spend wisely

Once you start getting your finances back in order, be careful not to undo all your good work by running up huge balances on your cards again. It might help you to cancel most of your cards and keep just a couple for emergencies and other necessary expenses. Establish a monthly budget and stick to it. Managing money carefully doesn’t mean you have to deprive yourself of all the fun stuff.  It just means that your monthly obligations will come first.  By budgeting carefully, you’ll pay your debts and household expenses and have money left over at the end of every month.

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