Credit card debt consolidation combines multiple card balances into one bill, giving you a single, convenient monthly payment. Consolidation is a winning debt payoff strategy when it provides a lower interest rate or a new repayment term that helps you pay down your balances faster and save tons of money on interest.
So how do you consolidate credit card debt?
Well, your credit scores, the amount of debt you have and your finances will determine the type of consolidation you qualify for. There are five popular consolidation options. We’ll review each one to help you decide which is right for you.
1. Balance Transfer Credit Card
You can use credit card balance transfers as a consolidation option if you have good-to-excellent credit. Balance transfer cards (which are offered by many card companies) work a lot like they sound: you transfer balances from a card (or cards) to a balance transfer card. With all your balances bundled into one card, you’ll make a single monthly payment. And if you took advantage of a 0% APR offer, you’ll enjoy interest-free payments for several months.
Look for balance transfer cards with 0% intro APR (aka annual percentage rate) offers. The introductory period typically lasts around 16 – 18 months. They help you save money, and you can potentially pay off your debt faster because you’re not paying interest on your balance.
Pay off your balance – or as much of it as you can – before the promotional period ends. If getting closer to paying off your debt is the goal, you’ll probably need to pay more than the monthly minimum payment.
Don’t forget about fees when you’re shopping for balance transfer cards – especially annual fees and balance transfer fees. Standard balance transfer fees range from 3% – 5% but look for 0% balance transfer fees to avoid paying to transfer your balances. After all, you’re trying to save money, not part with more of it.
How much you can transfer will depend on the card’s credit limit.
PROS of a Balance Transfer Credit Card👍
CONS of a Balance Transfer Credit Card👎
2. Debt Consolidation Loan
Besides a balance transfer credit card, another popular consolidation option is a debt consolidation loan.
A debt consolidation loan is a personal loan that provides a one-time lump sum of cash you can use to pay off your debt. The loan repayment term is typically 3 – 5 years. Most personal loans are fixed-rate loans, so your monthly payment will likely stay the same (or fixed) over the loan’s lifespan.
With a debt consolidation loan, you won’t need to juggle different payment amounts, different interest rates and different payment due dates. When your balances are consolidated into a single fixed-rate loan, you know what you’re paying every month and the exact date of your final payment. To top it off, debt consolidation loan interest rates are usually much lower than credit card rates. Another win.
If you can, automate your payments, and you’ll never forget to pay on time.
Start looking at personal loan offers where you bank and with other banks, credit unions or online lenders. But remember, just because you qualify for a loan doesn’t mean it’s the right loan for you.
Shop around for the best product, rate and term. Look out for interest rates and eligibility requirements. The loan terms you’re offered will depend on the amount of debt you have, your income and your credit scores. If you have good credit, use it to your advantage. The better your credit scores, the higher your chances of getting a great rate.
And remember, you may need to pay loan origination fees to process your application. These fees can equal between 0.5% and 2% of the loan amount.
PROS of a Debt Consolidation Loan👍
CONS of a Debt Consolidation Loan👎
3. Home Equity Loan or Line of Credit
You can use your home equity as collateral to borrow money through a home equity loan or home equity line of credit (HELOC) and pay off credit card balances.
A home equity loan offers a lump sum you repay over a fixed length of time and usually with a fixed interest rate. A HELOC works like a credit card. You receive a line of credit with a set credit limit. You withdraw from the line of credit during the draw period and only pay interest on what you withdraw.
Either option may be suitable for credit card debt consolidation if your credit isn’t awesome. That’s because home equity loans and HELOCs are secured loans (think: your home is the loan’s collateral), so they generally offer better interest rates than unsecured loans, like debt consolidation loans.
Do your research. Review closing costs, terms, your budget and any other important criteria a mortgage lender will examine before deciding on your approval.
PROS of a Home Equity Loan or HELOC👍
CONS of a Home Equity Loan or HELOC👎
4. Debt Management Plan
If you have a lot of credit card debt and your credit history has seen better days, consider a debt management plan with a credit counseling agency like the National Foundation for Credit Counseling or the Financial Counseling Association of America. Credit counselors can provide education and guidance to help you consolidate your balances and take control of your finances.
A counselor will negotiate with your lenders on your behalf to lower the interest rates on your debts. Then they’ll design a debt management plan (aka a payment plan) that lets you make a single payment to the agency every month. The agency will use your monthly payment to pay your creditors.
Repayment plans typically span 3 – 5 years and the agency usually charges a monthly service fee that’s included in your monthly payment.
PROS of a Debt Management Plan👍
CONS of a Debt Management Plan👎
5. 401(k) Loan
If you don’t qualify for any of the other options and don’t want to work with a credit counselor, borrowing from a 401(k) loan is an option – but it should always be a last resort.
The thing about your retirement account is that any money in it should be waiting for you in retirement. Borrowing from the savings of future you to pay for the financial trouble you’re facing today may help in the short term, but could deprive you of income when you most need it.
If you feel you have no other choice, you can withdraw funds from your 401(k) or 403(b) retirement account to pay off credit card debt.
You’d have up to 5 years to repay the loan. And it wouldn’t show up on your credit report like most other debt consolidation options.
PROS of a 401(k) Loan👍
CONS of a 401(k) Loan👎
Should I Consolidate My Credit Card Debt?
Are you still wondering whether you should consolidate now that you know how to consolidate credit card debt?
When you consolidate debt, your goal is to get out of debt faster and save money while doing it. The answer to “should you consolidate” depends on whether you can qualify for a lower interest rate. If you can’t, debt consolidation might not be the best option for you.
Do your research. Talk to your creditors because they may be willing to help you consolidate. Ask lenders about their loans and lines of credit. And remember, you can always try credit counseling and debt management plans.
Here are some other factors to take into consideration before you decide whether to consolidate your debt:
- Your budget
- Loan and credit card eligibility requirements
- Rules and regulations
- Pros and cons of each method
- Repayment term
- Potential outcomes
How does credit card debt affect your credit scores?
Your consolidation options will likely involve hard inquiries. You’ll want to avoid too many of these because it may temporarily hurt your credit scores. Your scores may dip after you transfer a large balance to a balance transfer card because it increases your credit utilization rate.
As long as you pay off your debt at a steady clip, your scores will bounce back over time. Remember to pay on time and try not to add more debt in the process.
Consolidate When It Makes Sense
Debt consolidation can lower your monthly payments, reduce the total amount of interest you pay and help you pay off your credit cards faster.
But it’s not the perfect solution for every debt situation.
When you consolidate debt, you acquire new debt to pay off old debt. No matter how helpful a loan, line of credit, balance transfer card or working with a credit counselor is, you still have a debt you must pay off. Carefully assess and evaluate your options before you make any big decisions.
Bonus: If you don’t want to take on new debt to pay off your credit card debt, have you ever heard of or considered the debt snowball method or the debt avalanche method? One of them might be the right debt payoff strategy for you.
Internal Revenue Service. “Retirement Topics – Plan Loans.” Retrieved October 2022 from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-loans