Key Takeaway: Credit card debt consolidation helps you combine multiple credit card debts into one payment, with the goal of receiving a lower interest rate and simplifying your finances in the process. Common tactics include taking out a balance transfer card, applying for a personal loan or home equity loan or working with a credit counselor.
Credit card debt consolidation involves combining multiple credit card balances into a new loan or card, ideally with a lower interest rate and into a single monthly payment to simplify your finances.
Common ways to consolidate credit card debt include taking out a personal loan for debt consolidation, opening a balance transfer card or tapping home equity.
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- What is credit card debt consolidation and how does it work?
- Best ways to consolidate credit card debt
- How to consolidate credit card debt
- Pros and cons of consolidating your credit card debt
- Is credit card consolidation right for you?
- Does consolidating credit affect your credit scores?
- What are alternatives to debt consolidation?
- FAQs about credit card debt consolidation
What is credit card debt consolidation and how does it work?
If you’re struggling with credit card debt, debt consolidation may help you manage your debt. Credit card debt consolidation works by using balance transfer cards or loans to pay off your credit card debt, combining all of your debt into one loan or credit card. You should aim for a lower interest rate on your loan or balance transfer to save money in the long run.
Best ways to consolidate credit card debt
If you’re looking to consolidate your credit card debt, some common options to consider are taking out a personal loan or balance transfer credit card as well as tapping into your home equity. Working with a credit counselor also may be worth considering.
1. Use a balance transfer credit card
A balance transfer lets you move balances from one or more credit card accounts to a different card.
This could be a good way to go if you plan on paying off your debt within a year or two. That’s because balance transfer credit cards often offer an introductory 0% APR on balances you transfer for a short amount of time.
Keep in mind that you may not be allowed to transfer balances between cards issued by the same lender. And if you opt for a balance transfer, it’s especially important to pay on time because late payments may cancel the introductory APR offer.
Pros
- If you pay off the balances you transfer before the introductory period expires, you could avoid paying interest charges on the transferred balance altogether.
- Simplifies multiple credit card payments into one account
Cons
- If you don’t pay off your balance before the intro period ends, the balance will accrue interest at the card’s regular rate
- Some cards charge a balance transfer fee that will add to the debt you must repay
- The credit limit you receive might not be enough to pay off all your debt
Our balance transfer calculator can help you estimate how much a balance transfer could save you.
2. Apply for a personal loan
If you need more time to pay off your credit card debt, applying for a personal loan might be a better choice. A debt consolidation loan is an installment loan that lets you pay off your debt in fixed monthly payments, similar to an auto loan.
While personal loans typically charge lower interest rates than credit cards, you probably won’t find one that offers an introductory 0% APR like some balance transfer credit cards do.
Pros
- People with good credit may qualify for lower interest than a credit card
- Flexible repayment terms to fit your budget
- Some lenders send debt repayment directly to your creditors
- Prequalification helps you compare potential rates without affecting your credit scores.
Cons
- Must meet the lender’s eligibility requirements to qualify
- May not qualify for the most competitive rates without strong credit and income
- Some lenders charge an origination fee that eats into your loan proceeds
3. Work with a nonprofit credit counseling organization
Credit counseling organizations can review your entire financial situation and work with you to create a plan to tackle your financial challenges. They give advice about credit issues, budgeting, money management and debt management.
If you work with a credit counselor, it’s important to research the organization before you get started. Check with your state attorney general’s office and consumer protection agency to ensure it’s reputable.
Pros
- Can work with your creditors to set up a debt-management plan on your behalf
- You’ll make a single monthly payment to the credit counseling organization
- Credit counselor may be able to negotiate lower interest rates or waive certain fees.
Cons
- Some credit counselors charge a fee for certain services
- You may have to agree not to apply for new credit or use your existing card to participate in a debt-management plan
4. Use home equity with a home equity loan or HELOC
Home equity loans and home equity lines of credit, or HELOCs, let you borrow against your home’s equity and use the cash to pay for just about anything. You could also consider a cash-out refinance if you qualify for an interest rate that is less than your current mortgage.
Pros
- Home equity loans often have lower rates than credit cards or personal loans because they are secured against your house
- Consolidating debt payments into one mortgage payment can simplify your finances
- You may be able to borrow more with a HELOC or home equity loan than other options
Cons
- Defaulting on your payments could put your home at risk for foreclosure
- Application and loan processing times are often longer than other options
5. Retirement account loan
If you participate in an employer-sponsored retirement account such as a 401(k) or 403(b), to use some of those funds to pay off your debts.
Pros
- Retirement account loans don’t require a credit check
- You’re borrowing from yourself, and the interest you pay goes back into your own retirement account
- Interest rates may be lower than some other options
Cons
- Not all employers offer loans against your retirement account
- The funds you borrow won’t earn investment returns to grow your retirement income.
- If you quit or lose your job before the loan is paid off, you may have to repay the full amount quickly
- Some retirement loans charge fees like loan origination or maintenance fees
How to consolidate credit card debt
- Assess your debt. The first step to consolidating your credit card debt is to look at your finances, including how much debt you have and your credit scores. When you know how much debt you have, you’ll have a better idea of how large of a loan or how high of a credit limit you may need.
- Choose you debt consolidation plan. There are a few different ways to consolidate your debt, such as personal loans, balance transfer cards, home equity loans and debt-management plans with a credit counselor.
- Find a lender. Prequalifying with multiple lenders can help you get an idea of what rates and terms you may be approved for. Prequalifying doesn’t guarantee you’ll get approved when you apply but it can help you narrow down who may offer you the best terms.
- Apply. Once you’ve selected a lender that works best for your situation, you can formally apply. Keep in mind that submitting an application may result in a hard credit inquiry.
- Pay off your debt. With your new funds or credit line, you can now consolidate your debt by paying it off or transferring your debt to your new card.
- Make payments. The last step is to start making payments on your new loan or credit card. On-time payments are a crucial factor in a healthy credit score.
Pros and cons of consolidating your credit card debt
Pros
- Possible to pay less interest over time.
- Easier to keep track of one payment instead of multiple.
- May help you pay off your debt fast.
Cons
- May not get approved for an amount that would cover all of your debt.
- Possible to not get approved for a lower interest rate.
- May have to pay an origination or balance transfer fee, adding to your debt.
Is credit card consolidation right for you?
If you’re finding it overwhelming to keep track of a lot of card payments each month, combining multiple debts into one through credit card consolidation may be right for you. Making just one payment a month can be easier to manage. And if you can get a lower interest rate on a new card or loan for the consolidation, you could start saving money on interest.
That said, there’s some risk in credit card consolidation. To start, if you can’t get a better interest rate, the consolidation could end up costing you more. Also, when you consolidate card debt, you free up room on your existing cards — and some people find it tough to avoid using that freed-up credit, making their debt problems worse.
Does consolidating credit card debt affect your credit scores?
Credit card debt consolidation could help improve your credit in the long run, but keep in mind that your credit may drop in the short term. You’ll be hit with a hard inquiry if you apply for a balance transfer card or personal loan, which can negatively impact your scores. The new account will also lower the average age of your credit. But these are only temporary setbacks that have a small-to-medium impact on your credit.
If you’re able to get a lower interest rate, debt consolidation could also help you pay off your debt faster, which will shrink your credit utilization ratio — an important factor in building credit. Plus, if you are able to pay off your loan or balance transfer card on time every month, you can build up your payment history to help improve your credit as well.
What are alternatives to debt consolidation?
If debt consolidation isn’t the right choice for you, there may be some other ways to help you pay down your debt. Here are some possible options.
- Snowball or avalanche debt repayment method —Paying off your smallest loan or highest interest loan first may help you start to tackle your debt
- Work with your creditors directly — You may be able to lower your interest rate or set up a plan that may work better for you by contacting your creditors directly.
- Bankruptcy — If you’ve exhausted all of your options, bankruptcy may be something to look into. But it shouldn’t be your first instinct since bankruptcy can negative impacts to your credit and may stay on your credit reports for 10 years.
What’s next?
Consolidating your credit card debt into a single payment may seem like the solution to your financial troubles, especially if you can get a lower rate.
Before consolidating your credit cards though, come up with a budget that will help you minimize your spending while you’re paying down your debt. You can also use our debt repayment calculator to estimate how long it could take to pay off your card debt. Once you have a plan, you can choose the credit card debt consolidation method that’s right for you.
FAQs about credit card debt consolidation
For many people, debt consolidation is a good strategy for paying off credit card debt. You might find credit card debt consolidation helps you simplify your finances by organizing your bills into one payment. But more importantly, it could potentially lower your interest rate and help you pay off your debt sooner.
Whether you consolidate with a balance transfer credit card or personal loan, you may pay a fee. For a balance transfer, you’ll typically be charged a 3% to 5% fee. Som personal loan lenders may charge an origination fee — a percentage of your total loan amount that generally ranges from 1% to 8%.
Yes, it is possible to continue using your credit card after consolidating your debt. But before you start using your credit card, make sure you’re able to pay off what you’re spending. You don’t want to get in more debt after consolidating your current debt.
How much you may save by consolidating your credit card debt depends on your previous interest rate, new interest rate and how long it takes you to pay off the debt as well as any fees. You can use our balance transfer calculator to help you estimate what you may save by using a balance transfer credit card to consolidate your debt.
The best debt consolidation loan depends on your credit, how much you want to borrow and how quickly you need the funds. Unsecured personal loans are typically preferable to secured personal loans since they don’t require collateral like a vehicle or other property. You can prequalify before officially applying to see what rate and terms you may qualify for.