How to Consolidate Credit Card Debt
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- What Is Debt Consolidation and How Does It Work?
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Americans’ collective credit card debt hit a record $1.17 trillion earlier this year, and the average credit card debt is now $6,329. Managing that balance is even more complicated when your total debt is spread across multiple cards, each with a different interest rate and payment deadline.
Credit card debt consolidation is one solution. Consolidation is the process of paying off debt from multiple credit cards using a single loan or credit card. This streamlines your payments, allowing you to pay off your debt more efficiently. Consolidating your debt can also help you save money on interest payments if you get a lower interest rate on your new balance.
The top seven ways to consolidate credit card debt
There are several options if you want to consolidate your credit card debt. Depending on your credit score and other factors, you may qualify for several types of debt consolidation, and it’s important to compare the pros and cons of each. Just because you can opt for a given method doesn’t mean it's the best choice for your financial situation.
1. Take out a personal loan
People interested in consolidating their credit card debt often turn to personal loans as a solution. One advantage of doing so is that many lenders offer fixed interest rates, which provide a stable monthly payment for the life of the loan. Since personal loans generally have lower APRs than credit cards for those with good to excellent credit, they can help you save money and pay your debt off faster.
You can get a personal loan from a bank, credit union or online lender. Taking out unsecured personal loans — loans without any collateral like your home or vehicle — to consolidate debt may be difficult for people with fair or bad credit. If that’s the case, shop around at multiple lenders to find the lowest annual percentage rate you’re eligible for.
Certain credit inquiries, called hard inquiries, can bring down your credit score, but you can pre-qualify for a debt consolidation loan through many online lenders without worrying about hurting your score. This will let you preview your rate, loan term and loan amount that you'll have access to after you formally apply. Keep in mind that these numbers aren’t guaranteed; they’re simply estimates of what you might qualify for after a hard inquiry.
2. Get a balance transfer credit card
Balance transfer credit cards allow you to transfer debt from other cards to a single one. They typically offer an introductory period of one year or more during which the credit card company charges a 0% annual percentage rate (APR) on the amount transferred. When the introductory period ends, the balance transfer card will charge you regular credit card interest rates on the remaining balance.
These cards generally charge a one-time balance transfer fee (between 3% and 5% of the balance you transfer). Even with the fee, the savings on interest can be significant — if you’re able to pay down the amount you transferred before the 0% promo rate expires. If, on the other hand, you pay the fee to transfer a sum and let it sit until it starts accruing interest again, this route can end up costing you more.
Another caveat: Many balance transfer cards only accept applicants with good or excellent credit scores. If your score is fair to poor, you might find it difficult to qualify for one of these cards.
3. Tap into your home equity
If you’re a homeowner with significant home equity, another way to consolidate credit card debt is to take out a home equity loan or home equity line of credit (HELOC) to cover your outstanding balances. Both of these financing products allow you to borrow against the equity in your home, which is the difference between your property’s current market value and the amount remaining on your mortgage.
Home equity loans and HELOCs generally have lower interest rates than personal loans because your home serves as collateral. Just bear in mind that they also come with closing costs and fees, and you’re putting your home on the line if you can’t meet the payments on your loan.
4. Take out an auto equity loan
Similar to a home equity loan, an auto equity loan allows you to leverage the equity in a vehicle you own to consolidate your credit card debt. Because your vehicle is put up as collateral, the interest rate on an auto equity loan is generally lower than the rate on an unsecured personal loan.
The main drawback of auto equity loans is that, because cars depreciate in value over time, you risk going “upside down” on your car loan. This means you may end up owing more on the car than it’s currently worth. Additionally, auto equity loans are hard to find — most major lenders don’t offer them — and your car can be repossessed if you default on the loan.
5. Use a debt management program
Debt management programs are specifically designed for people struggling with multiple forms of debt. These plans, organized and run by non-profit credit counseling agencies, offer fixed monthly payments on your consolidated debt with lower interest rates.
The downside of these plans is that it can take up to five years to pay off your whole balance, and they typically come with a small monthly fee. However, if you think you’d benefit from the extra budgeting guidance a credit counselor can provide, this could be the best way forward, particularly if you have a low credit score and don’t qualify for other credit card debt consolidation methods.
6. Turn to family and friends for a loan
If you have family or friends willing to lend you the funds to help pay off credit card debt, that can be a great option. Even if they charge you interest, a loan from someone you know might come with better rates than debt consolidation loans from professional lenders. You also won't have to worry about credit checks or damage to your credit score.
If your family or friends don’t have the funds to lend to you directly, you could also ask them to cosign a debt consolidation loan and it may help you get approved at lower rates.
Be aware that taking a loan from a friend or family member comes with the risk of hurting your relationship with that person if you are unable to pay off the loan in full. Set clear terms and get a loan agreement in writing to avoid conflict down the line.
7. Borrow from your 401(k)
In some cases, you may be able to borrow from your employer-sponsored 401(k) plan to pay off your credit card balances. Loans from a 401(k) are generally due in five years, but if you quit or are laid off, the balance will be due on tax day the following year.
Since you’re borrowing from retirement funds, using a 401(k) loan to consolidate debt carries significant risk. If you can’t repay the loan, then the unpaid balance is considered a withdrawal from your account, meaning it’s subject to taxes and, if you’re under 59 ½, an early withdrawal penalty. Only consider a 401(k) loan if other credit card debt consolidation options aren’t available — and even as a last resort, you’ll find this solution is not often recommended.
What you should do before consolidating your credit card debt
Don’t jump straight into credit card consolidation. Consider the following steps to make sure you succeed with the process.
Assess your financial situation
Start by making a list of all your credit card accounts, including their outstanding balances, interest rates, minimum monthly payments and due dates. Include other debts as well, such as personal or auto loans, to see how credit card debt fits into your broader financial picture. Then, add up all your credit card balances to understand the full amount you need to consolidate.
The number you end up with will help you identify your consolidation options, including the loan amount you’ll need or your balance transfer limits.
Make a budget
Consolidating debt can help you save money on interest, but you still have to be able to afford the payment on the new consolidated amount. For that, you may need to start at square one with a budget. Your personal budget should serve as a guide to cut back on additional expenses and avoid impulse purchases, ultimately helping you pay down your debt.
Weigh your consolidation options carefully
The best strategy to pay off credit card debt is the one that allows you to pay off your balance the fastest without putting your other financial goals, like saving for retirement, at risk.
To find the best option for your individual goals and financial situation, compare APRs, credit requirements, loan periods and other loan terms. Use an online debt consolidation calculator to determine if consolidating will reduce your total costs or shorten your repayment time. Don’t forget to factor in fees like loan origination costs or balance transfer fees.
Seek expert advice
Consulting with experts can provide valuable insights tailored to your financial situation. Professionals can help you understand your options, avoid costly mistakes and create a sustainable plan for managing and eliminating debt.
Credit counselors, typically affiliated with nonprofit organizations, offer free or low-cost advice on the best way to pay off credit card debt and how to negotiate with debt collectors. They can charge for some services, though, namely facilitating debt management plans. You can also seek out pro bono services from other experts like financial planners and tax professionals.
Does credit card debt consolidation affect your credit score?
Consolidating your credit card debt may cause your credit score to decrease, but don’t panic. This drop in your credit score should be short-term, and it’s usually caused by hard credit inquiries, which allow financial institutions to review details like your debt-to-income ratio, total outstanding debt and payment history to decide if you’re eligible for a loan.
On the plus side, credit card debt consolidation can help you raise your credit over time, despite the initial dip. Depending on the limit on your new consolidation loan, your credit utilization — the ratio of your outstanding balances to your total available credit — may go down, increasing your credit score. (But note that if you close credit card accounts while consolidating your debt this won’t be the case.)
Finally, consolidating credit card debt may make it easier to build and maintain a solid payment history, since it’s simpler to manage one balance, especially with a lower interest rate. Payment history is the most important factor in your credit score, so consistently paying on time can raise your credit score.
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