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More than 40 percent of households in the U.S. have at least some credit card debt. California ranks third in the nation for the highest level of debt, with the average household owing around $10,500. If you’re having difficulty paying down your balances and escaping the debt cycle, consolidating your credit card debt may be a solution. Here’s how it works and how to determine if it’s the right decision for you.

How Credit Card Debt Consolidation Works

Debt consolidation involves consolidating multiple debts, such as balances on several credit cards, into a single new loan. There are several ways to consolidate credit card debt, each with its own advantages and drawbacks. The simplest method is transferring your existing debt to a “balance transfer credit card,” which is a card with a zero-percent intro APR on balance transfers and no interest for up to 18 months. You may also consider taking out a personal loan to pay off the credit card balances, using a home equity loan, or even paying back the debt with a debt repayment plan. This last option may be the riskiest, as not all debt consolidation companies are reputable.

Before you decide which method to use, it’s a good idea to consult an experienced financial advisor. San Diego residents who don’t feel comfortable with their level of knowledge about debt consolidation can benefit from professional guidance.

Pro: Save on Interest

Debt consolidation can pay off if you can get a lower interest rate on your debt. Before consolidating, check the interest rate you’re paying on each credit card and determine your average interest rate. High-interest cards may have an interest rate of 20 to 29.99 percent. Depending on the debt consolidation option you choose, you may qualify for a rate as low as 8 percent or less. With a balance transfer credit card, you can even qualify for an introductory offer with no interest for 12 to 18 months. Imagine you have a balance of $10,500 with an interest rate of 22 percent. With minimum payments, it would take a whopping 57 months to pay off the balance, with more than $6,400 added in interest. You open a new credit card with a zero-percent intro APR for 18 months, and a balance transfer fee of 3 percent ($315) is added to your balance. The regular APR after the intro period is 13 percent. You could pay off the balance in 39 months instead and pay just $910 in interest, even if you make only the minimum payments.

Pro: Pay Down Debt Faster

With a lower interest rate, more of your monthly payments will go toward your principal balance instead of interest payments. A single monthly payment also helps you pay down the debt faster because your monthly payment is going toward a single balance.

Pro: One Monthly Payment

When you consolidate your debt, all your credit card payments become a single monthly payment, which makes it easier to budget for your debt payments and avoid overlooking a credit card payment and damaging your credit score.

Con: May Be Creating Secured Debt

Depending on how you consolidate the debt, you may be converting unsecured credit card debt into debt that is secured by something—such as your home, in the case of a home equity loan. Unsecured loans are based on your promise to pay. If you default, the loan isn’t secured by property that can be repossessed or foreclosed. Turning unsecured credit card debt into secured debt can put your home or other property at risk if you aren’t able to keep up with the payments, which isn’t necessarily a bad thing, since a secured loan probably has a lower interest rate than an unsecured loan.

Con: There May Be Costs

Before consolidating debt, explore your options and determine which, if any, fees you’ll need to pay. Even a balance transfer credit card may come with a balance transfer fee of 3 percent as well as an annual fee. Personal loans and home equity loans come with closing costs. Debt consolidation companies also have a bad reputation, and some may charge high fees for their service. Consider all potential costs and use a debt consolidation calculator to determine if consolidating your debt is in your best interest.

Credit card debt is a problem for a lot of Americans, but there are available options, including debt consolidation, for lowering that debt in a smart way. If you need advice about the best methods for paying down your debt, talk to an experienced  financial planner. Jan Gleisner has 16 years of experience in financial planning and can help you figure out the most effective path toward becoming debt free. Call 858-337-2385 to schedule an appointment.