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Consolidating credit card debt could help simplify and lower your monthly payments as you work to become debt-free.
Consolidating credit card debt is when you combine multiple credit card balances into a single monthly payment that ideally has a lower interest rate than what you’re currently paying.
But consolidating your debt takes time, and many methods require an application process to see whether you’re approved first, which usually results in a hard credit inquiry that can cause your credit scores to drop a few points.
To help you decide if credit card consolidation is right for you, here are several methods to consider.
- Work with a nonprofit credit counseling organization
- Apply for a personal loan
- Use a balance transfer credit card
- Ask a friend or family member for help
- Cash-out auto refinance
- Home equity loan
- Retirement account loan
- Navigating credit card debt during COVID-19
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: A credit counseling organization may work with your creditors to set up a debt-management plan on your behalf, which requires you to make a single monthly payment to the credit counseling organization each month. The organization then uses the money you provide to pay your creditors. Your credit counselor may also work with your creditors to negotiate lower interest rates or waive certain fees.
Cons: Some credit counselors may charge a fee for some of their services, and you may have to agree not to apply for new credit or use your existing credit if you participate in a debt-management plan.
Apply for a personal loan
A personal loan can be used to consolidate debt, and the funds from a debt-consolidation loan can be used to pay off your credit card balances. So instead of making multiple credit card payments each month, you make one payment for the personal loan.
Pros: If you have good credit, you may qualify for a lower interest rate on a personal loan than the rates your credit card issuers are charging. Personal loans offer flexible repayment terms, so you can select the one that’s right for your budget. Plus, some lenders will send payment directly to your creditors, so you won’t be tempted to use the loan funds for something else. And many lenders offer the option of applying for prequalification, so you can shop around to see what your potential options are without affecting your credit scores.
Cons: You need to meet the lender’s eligibility requirements to qualify for a personal loan. If you’ve had financial difficulties in the past, you may not be eligible, or you may only qualify for an interest rate that’s comparable to the current rate on your credit cards. In addition, some lenders charge an origination fee, which could add hundreds of dollars to the cost of your loan, which could eat into your loan funds before you even receive them.
Use a balance transfer credit card
A balance transfer lets you move balances from one or more credit card accounts to a different card. Balance transfer credit cards often offer an introductory 0% APR on balances you transfer within a certain amount of time.
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.
Cons: The promotional period is limited. If you don’t pay off the amount you transfer (in full and on time) before the intro period ends, the remaining balance will accrue interest at the card’s regular rate.
In addition, some cards charge a balance transfer fee, which will add to the debt you must repay. Also, the amount you transfer — including any fees charged — can’t be higher than your credit limit, which may not be high enough for you to pay off all your debt.
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.
Ask a friend or family member for help
Depending on how much money you owe and what your overall financial picture looks like, it may make sense to ask a friend of family member to lend you the money.
But if you opt for this method, it’s important to be sure the loan terms and repayment plan are clearly outlined, just as they would be if you were getting a loan from a financial institution.
Pros: When you borrow money from somebody you know, you don’t have to meet minimum eligibility requirements to qualify for the loan, and you may be able to get a lower interest rate than you would from a bank or credit union.
Cons: Borrowing money from someone you know is tricky because it can put a strain on your relationship. Also, if you’re unable to repay the loan on time, you might be putting their finances at risk.
Heads-up on the following options
The following are other credit card consolidation methods that are available, but we don’t recommend them because they’re riskier than the options we’ve discussed above.
Cash-out auto refinance
Some lenders offer cash-out refinance auto loans that allow you to use the equity in your car to issue you a loan for other expenses, like consolidating credit card debt. But if you’re unable to make your payments, you risk losing your vehicle.
Home equity loan
Home equity loans let you borrow against your home’s equity and use the cash to pay for just about anything. This may seem like a good option because these loans often have lower rates than credit cards and personal loans. But if you default on payments, the lender typically has the right to start foreclosure proceedings, and you could lose your home.
Retirement account loan
If you participate in an employer-sponsored retirement account such as a 401(k) or 403(b), it may be tempting to use some of those funds to pay off your debts. Retirement account loans don’t require a credit check as long as your plan offers a loan option — some don’t — and interest rates are typically lower than what you’d pay at a bank or other lender. But if you’re unable to make your payments, the amount you withdrew could be taxed, and you might have to pay a penalty on top of that. Since the funds you borrow won’t earn interest, you’re missing out on an opportunity to grow your retirement income.
Navigating credit card debt during COVID-19
If the financial impact of the coronavirus pandemic has you looking for ways to consolidate your credit card debt, you’re not alone. Many people may find themselves with more debt right now or may be facing debt issues they’ve never encountered before.
If that describes your situation, you may have more than one option.
We’ve compiled some resources to help you find relief measures announced by the government, credit card issuers and more. If you can take advantage of these relief measures, they may help ease some of your financial burden, making your debt more manageable. Check out our summaries of those resources below.
Government relief measures
Relief measures from lenders and credit card issuers
- Coronavirus auto loan payment and debt relief: What some auto lenders are doing to help
- Coronavirus: Mortgage debt relief programs for homeowners
- Coronavirus credit card payment and debt relief: How issuers are responding to COVID-19
- Coronavirus student loan payment and debt relief: What lenders are doing to help
General advice for paying down debt
If you’re looking for general tips on how to budget or navigate your credit card debt, we can help you with that too. Check out some of our advice articles below.
- How to get out of credit card debt
- Credit Karma guide to budgeting
- How to get out of debt in five steps
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. Once you have a plan, you can choose the credit card consolidation method that’s right for you. And try to avoid choosing a debt-consolidation method that may put your house, car or retirement in danger.