6 Best Ways To Consolidate Credit Card Debt

Having a few credit cards at your disposal can be lifesaving; you can use them for emergencies, reward points or to float you for 30 days if you need extra cash.

However, misusing your credit cards can land you in deep debt. In fact, a recent report released by The Federal Reserve Bank of New York reveals that Americans owe a collective $986 billion in credit card debt.

This is where credit card consolidation comes in handy – you can get your credit card bills under control and have only one payment.

We’ll go over what credit card consolidation is, six ways to consolidate your credit card debt and how and when you should consider consolidating your credit card debt.

What Is Credit Card Debt Consolidation?

Credit card debt consolidation is a way of reducing your credit card debt by combining multiple balances into a single, low-interest monthly payment. The goal of consolidating your credit card debt is to lower your overall monthly payments, save you money on interest and remove some of the stress that comes with high credit card debt.

Consolidation can be a more efficient way to pay off credit card debt because you’ll get to start paying off the principal (the amount you actually owe) much faster, depending on your consolidation method.

How Does Credit Card Consolidation Work?

Essentially, consolidating your credit card debt means putting all your debt in the same place. Instead of making multiple debt payments each month, you obtain a new loan or credit card that exists solely for the purpose of paying off your debt.

To qualify, however, you must meet the lender’s specific eligibility requirements. It’s also important to carefully consider the new terms being set by your lender, as you could end up paying even more in interest.

Consolidating your credit card debt, then, may not always be the most advantageous choice. This is why it’s crucial to explore all of your options and get all the facts before deciding to consolidate your debt.

How To Consolidate Credit Card Debt: 6 Ways

There are many ways you can consolidate credit card debt; the option that you choose is going to depend on your specific situation. To determine which option works best for you, consider things like your credit score, how much you owe, and how much money you will have for monthly payments.

Let’s now discuss six effective ways to consolidate credit card debt.

1. Credit Card Consolidation Loan

A credit card consolidation loan is essentially an unsecured personal loan with a low interest rate. You can obtain a personal loan from a bank, credit union or installment loan lender.

When you’re applying for a personal loan, one of the options you can choose for why you need the loan is “debt consolidation.” Once you have been approved for the loan, you’ll use it to pay off your credit card balances. Going this route would leave you with only the loan to pay back in monthly preset installments.

It’s also easy to apply for a personal loan online at places like Rocket Loans^SM where you could get the loan approved and funded within 24 hours in some cases.

However, to get approved for a credit card consolidation loan you must meet the borrower qualifications set by your lender. Lenders often evaluate factors like your credit score, income, and debt-to-income ratio (DTI) when deciding whether or not to give you a debt consolidation loan.

Pros

• Only one creditor remains – The best thing about getting a personal loan to pay off your credit card debt is that it leaves you with only one creditor to deal with. If you had five cards with balances and you pay them off with the loan, you will only have one account and one payment to deal with.
• Interest rate may be lower – The one benefit you can’t look past is obtaining a lower interest rate. Personal loans may have a lower interest rate than a credit card, and if you have multiple cards, your interest rates can be very different. Getting one fixed rate for all your debt is a huge benefit.
• You can take your total credit card utilization to 0% – When you take all of your revolving credit card debt and place it on a personal installment loan, it changes your credit utilization drastically. This happens because an installment loan is not counted toward your credit utilization, meaning you could go from 80% utilization to 0% instantly. You could see an increase in your score and still be able to pay down your personal loan at a lower interest rate.

Cons

• Origination fees – Fees associated with getting a personal loan are known as origination fees. They can range from 1% – 8% of the total loan amount. You should factor this in to how much the loan is going to cost you regarding paying it back.
• You need a good credit score – Since you’ll have to apply for this personal loan, you’re going to need a good score to qualify. If you’ve been in debt for a while, you may not have a strong enough score to qualify.
• Hard credit inquiry – You will probably get a hard credit inquiry when you apply for the loan, which means you’ll probably see your credit score drop a few points.

2. Balance Transfer Credit Card

When you repay an existing debt with a new credit card, it’s considered a balance transfer. Keep in mind that these transfers don’t get rid of your current balance; it just moves from one creditor to another.

The goal of a balance transfer is to get a lower interest rate on your debt to help you pay off your balance without accruing additional debt. Some balance transfer cards offer promotional terms such as a 0% annual percentage rate (APR) or low-interest introductory offers.

It’s essential, however, to make your payments on time and repay the amount you transfer before the introductory period ends. Otherwise, you could end up paying your remaining balance with an interest rate at the card’s regular APR. Some cards may also charge a balance transfer fee.

Almost every major credit card company will allow you to do a balance transfer. For more information, be sure to ask your creditor about their credit cards for consolidation options and what it takes to qualify.

Pros

• Lower credit utilization – One possibility is that you can decrease your overall credit utilization and help increase your score. For example: Let’s say you have one credit card with a $15,000 limit (Card A) and another card with a $5,000 limit (Card B). If you owe $4,500 on Card B, then your utilization for that card would be almost at 100%, which would hurt your score. If you did a balance transfer from Card B to Card A, this would put your utilization for Card B to 0% and put your utilization on Card A at only 30%. This is a great strategy for paying debt down faster and increasing your score. (This example does not include any balance transfer fees for simplicity.)
• Lower interest rate – It goes without saying, but you should never do a balance transfer to a card with a higher interest rate. The benefit of this transfer is that you are going to get a lower interest rate and be able to pay down your principal balance much faster.
• Avoid late payments – If you transfer your balance at the right time, you’ll be able to avoid any late payments on your credit profile. Being even 30 days late could damage your credit, so it’s best to keep that from happening.

Cons

• You need good credit for best rates – Unfortunately, you’re usually going to need a good score to qualify for a credit card that has a 0% balance transfer introductory rate.
• Balance transfer fees – There are also balance transfer fees that come with some of the credit cards (up to 5%) to consider. Be sure you can cover these fees without going deeper into debt, otherwise this option may not be right for you.

3. Home Equity Loan

When it comes to consolidating your credit card debt, some options are riskier than others. For the options we’ll consider below, be very cautious – taking out a secured loan for unsecured debt is rarely a good idea.

Think of a home equity loan as a second mortgage; you take out the amount you want to borrow in a lump sum and pay it back over a 5 – 15 year time period. The amount you can borrow is a percentage based on the current value of your home minus what you owe on the mortgage. 

For example, let’s say your home is currently worth $250,000, but you only owe $200,000 on the mortgage; you could potentially borrow up to $50,000 in a home equity loan, although lenders may not allow you to take more than 80% – 90% of your home equity out at a time.

There are some advantages and substantial disadvantages of using this method.

Pros

• You can pay off a larger amount of debt – If you have substantial equity in your home and are confident you’ll be able to make both mortgage and home equity loan payments, this option may work for you. Outside of being able to pay off a larger amount of debt, there doesn’t seem to be any additional benefit of choosing this route to clear your credit card debt.

Cons

• A second mortgage – If you take out a loan on your home for credit card debt, you’re going to have a second mortgage. This means two monthly mortgage payments instead of one payment.
• Foreclosure – Home equity loans are secured using your home as collateral – your lender could foreclose on your house to recoup the cost of your loan to them. The worst thing that could happen is foreclosure because you couldn’t keep up with two mortgage payments. This risk seems too high of a cost to clear credit card debt.
• Higher rate than primary mortgage – This could backfire because your interest rate will likely be higher on your second mortgage than your primary mortgage, costing you more money over time than it would have by just paying off your cards without the home equity loan.

4. Home Equity Line Of Credit (HELOC)

A home equity line of credit (HELOC) is similar to a home equity loan. The main difference is that with a home equity loan, you receive the loan in one lump sum; with a HELOC, a line of credit remains open and you can use it as needed throughout your draw period. 

To qualify for a HELOC, you’ll typically need reliable income, good credit (usually above the mid-600s), at least 15% – 20% home equity, a responsible payment history and a low DTI. Consult your lender to see what else they require for qualification.

You’ll pay back your HELOC in two phases: the draw period and repayment period. The draw period is when your line of credit is open for use. During this time, you’ll only be required to make minimum payments or even interest-only payments on the amount you’ve borrowed.

Once the draw period ends, the repayment period begins. At this time, you’ll no longer have access to the HELOC funds and must start making full monthly payments on both the principal and interest.

Pros

• You can pay off a larger amount of debt – Similar to a home equity loan, a HELOC makes it possible to pay off a larger amount of debt and usually at a lower interest rate than you’d get on a credit card.

Cons

• Foreclosure – Since you are using your home as collateral, obtaining a HELOC is a very risky route to take when trying to pay off credit card debt. If you’re unable to make payments, you could end up losing your home.
• An impractical option for paying off credit card debt – A HELOC shouldn’t be used to pay for daily expenses or debt. It’s wise to only use a HELOC for things that will put you in a better financial position.

5. 401(k) Loan Or 401(k) Withdrawal

If you take any money from your 401(k) before you reach age 59½, the IRS will charge you a 10% early withdrawal penalty fee. Since these funds come from your pretax income, you’ll also have to pay taxes on any amount you take out.

You could ask if your employer has a hardship distribution plan, which could help you avoid those fees for specific hardships; debt consolidation may not be covered by these plans.

Besides the prospect of paying off your debt, there doesn’t seem to be an advantage to withdrawing from a 401(k) to pay off credit card debt. So, below are only the disadvantages.

Cons

• Fees and taxes – As stated above, along with paying taxes, you’ll also pay a penalty if you’re 59½ years old or younger. This option should be a last resort.
• Decrease in retirement savings – If you remove money from your 401(k), you’re decreasing the amount of runway you will have in retirement. This method will not only decrease your savings but increase fees you’d have to pay.

6. Debt Management Counseling

Debt or credit counseling is a service usually offered by nonprofit organizations from counselors who are certified and trained in money and debt management, consumer credit and budgeting.

You should check with your local consumer protection office to prevent any possible scams.

These counselors typically will discuss your financial situation and help you come up with a personalized plan to consolidate your credit card debt or any other money issues.

Credit counselors can:

• Assist you with creating a budget
• Advise you on how to manage your money and debts
• Help create a debt management plan for paying down debt
• Offer free educational materials and workshops

Pros

• Lower monthly payments – Your monthly payment through a debt management program will likely be lower than your current payments. A lower payment makes it easier and faster to pay off your bills.
• Calls from collection agencies go away – Getting daily calls about a late bill can stress you out and make your credit card debt situation even harder. A credit counselor should be able to get those calls stopped while you are enrolled in the program and making your arranged payments on time.
• Lower interest rates – A credit counseling service may be able to help you negotiate lower payments and obtain a much lower interest rate on your overall debt.
• Late fees could be waived – There’s no way to guarantee that a creditor will waive your late fee; however, a credit counselor could help with this.
• Only one payment per month – You only have to make one payment to the credit counseling service, which will distribute payments to each creditor on your behalf.

Cons

• You can’t use your credit – One of the bad things about using a credit counseling company is that you have to close the account that you enroll in the program. This means you’ll be unable to use your credit while you’re in this program.
• You probably won’t be approved for new credit – If you have a plan to get a car or buy a home or refinance, it’s probably not going to happen while you’re enrolled in this type of program. These programs usually last up to 4 years, with the primary goal to help you get out of debt, not take on new loans to build more debt.
• You must enroll all eligible debts – Even if you have cards with a good interest rate, you still have to enroll all of your accounts into the debt management program. This isn’t always a good option because having to close all your accounts will hurt your average age of accounts, a factor in determining your credit score.

When Should You Consider Consolidating Credit Card Debt?

As we’ve considered, there are many ways to consolidate your credit card debt. The best way for you will depend on your unique situation.

But generally speaking, consolidating your credit card debt could be a good idea if:

• You have high-interest debt – If you have multiple sources of debt which you’re paying a high amount of interest on, consolidating your debt could be beneficial. By combining your debt into one loan or monthly payment, you could reduce the amount you’re paying in interest and alleviate some of the hassle that comes with managing various payments each month.
• You stay on top of your monthly payments – If you’re certain that you can stay on top of your monthly payments, the terms that often come with credit card consolidation can help you pay off your debt faster at a lower interest rate. 
• You have a good credit score – If you have a good credit score, you’re more likely to qualify for a credit card with a 0% interest period, or for a loan with low-interest terms.

Credit Card Debt Consolidation FAQs

Still have questions about credit card debt consolidation? No worries. Here are answers to some frequently asked questions.

Does consolidating credit card debt affect my credit score?

Yes, consolidating credit card debt can affect your credit score – for better or worse depending on how you choose to settle your debt. Opening up a new account and utilizing more credit can negatively impact your credit temporarily. However, if you make all your payments on time while reducing your debt, over time the negative effects can diminish and ultimately leave you in a better financial position.

Can I still use my credit card after debt consolidation?

Yes, but this will depend on your unique situation. If your account is still open and in good standing, you should still be able to use your credit card after consolidation. But it’s important to maintain good spending habits and to continue making your payments on time. If you choose to enroll in a credit counseling program, you may have to close your credit accounts – in this case, you would not be able to use your cards.

What is the best way to consolidate credit card debt?

While there is no single best way to consolidate credit card debt, there are many effective options. What is “best” varies – what’s best for one person may not be beneficial for another. Some of the most common ways to consolidate credit card debt include taking out a debt consolidation loan, using a balance transfer card or entering a debt counseling program.

What is credit card refinancing vs. debt consolidation?

Credit card refinancing, typically done through a balance transfer or personal loan, and debt consolidation both can help you minimize your credit card debt. Credit card refinancing may give you access to a 0% introductory interest rate, which generally expires in 12 – 18 months. If you don’t pay off your debt in that amount of time, you risk facing interest rates as high as 20%. Debt consolidation, on the other hand, assigns you an interest rate – ranging anywhere from 4% – 36% – based on your credit score and other factors.

Is consolidating credit card debt a good idea?

Consolidating your credit card debt can be a good idea if you have good credit and can stay on top of your monthly payments. However, if your credit score isn’t ideal and you’re not in the position to pay off debt in a timely manner, it could be to your detriment. Whether it’s a good idea or not will depend on your specific financial situation. Before making any important financial decisions, it’s best to consult with a financial professional.

The Bottom Line: Consider Your Options Before Consolidating Credit Card Debt

When your credit card debt becomes unmanageable, consolidating your debt can be the fastest way to take control and ease your stress.

Your main goal for any credit card consolidation should be to reduce costs and simplify your finances. Figuring out the best way to consolidate your debt will be entirely up to you, but whatever avenue you choose, it’s important to stay on top of your monthly payments and practice good financial habits. Choose the way that benefits you the most financially and try your best to eliminate your credit card debt.

Acquiring the right help can put you on the path to financial freedom. Download the Rocket Money℠ mobile app today for an effortless way to manage your personal finances in one place.