6 ways to consolidate credit card debt
September 7, 2023 7 min read
Managing debt can be stressful, particularly if you fall behind on bills and are watching interest charges build up. If you find yourself struggling, consolidating your credit card debt could be one way to simplify and lower your payments.
Keep reading to learn a few methods to consolidate credit card debt, including some potential risks and benefits.
- Credit card debt consolidation might allow you to combine multiple debts into a single payment with a lower interest rate.
- Common ways to consolidate credit card debt include balance transfers, personal loans, retirement plan loans, debt management plans, home equity loans and home equity lines of credit.
- Be sure to carefully consider the details of any consolidation loan.
- While credit card debt consolidation may be a helpful debt management option for some, it isn’t right for everyone.
What is credit card debt consolidation?
In basic terms, credit card debt consolidation allows you to combine several credit card balances. If you’re currently making payments on multiple credit cards each month, you may be able to combine them into one monthly payment by using a loan or a balance transfer.
Ways to consolidate credit card debt
Here are six options for consolidating credit card debt:
1. Balance transfers
A balance transfer can be used to consolidate multiple balances into one credit card account. Part or all of your debt from other cards is moved to the balance transfer card. And you then make monthly payments to the new card going forward.
If you’re interested in this option, it also might be worth considering:
- How long introductory interest rates apply to transferred balances—and whether the rate will apply to new charges you make.
- How your rate could change over time—and what it could cost you—if you don’t pay off your debt. If the rate after the introductory period is higher than what you’re paying now, you’ll need to think carefully about whether it’s a good idea to transfer.
- Whether any transfer fees will be added to your transferred balance.
- How a balance transfer could affect your credit.
2. Personal loans
Situations vary, but typically, personal loans are unsecured. If a personal loan is unsecured, it means you don’t have to provide collateral to be approved for the loan. But there may be other factors that determine whether you’re qualified.
If you’re approved for a personal loan, you could pay off or pay down your credit card debt with the funds. The money you previously used for monthly credit card payments would then go to pay off the personal loan.
But keep in mind that not all personal loans are the same. Here are some things to think about:
- Which kind of personal loan you’re agreeing to. Payday loans, for example, have their own unique risks.
- Whether the interest rate on your loan will be lower than the interest rate for your credit cards—and how long the rate will last.
- Whether your personal loan comes with fees or credit insurance that could end up costing you more in the long run.
3. Retirement plan loans
With a retirement plan loan, you’re borrowing from your savings instead of from a lender. Not every type of plan allows it, but it might be an option with:
In general, these loans have relatively low interest rates, and you don’t have to go through a credit check to access them. But there are several things to consider about retirement plan loans, including:
- If you fail to repay your loan on schedule and it goes into default, you may owe early withdrawal taxes and a 10% penalty.
- Even after paying the loan back, you could end up with less money in your retirement plan because you’d have missed out on any investment earnings.
- If you leave your job or go bankrupt, you still have to pay the loan back in full. If you can’t, you may owe early withdrawal taxes and penalties.
4. Debt management plans
You could also consider setting up a debt management plan through credit counseling. Credit counselors are trained to understand credit card debt and teach people how to manage it.
You can get help finding credit counselors from the National Foundation for Credit Counseling and the Financial Counseling Association of America. Both are recommended by the Consumer Financial Protection Bureau (CFPB).
Once you find a service, the CFPB also has a list of questions to ask about credit counseling. In general, the agency recommends:
- Finding a credit counselor who offers a range of services that can be done in person, by phone or online.
- Finding out about your counselor’s qualifications and avoiding credit counselors who aren’t willing to send you free educational materials or information about themselves.
- Finding out about fees and contracts. If an organization turns you away because you can’t afford to pay them, you might be better off going somewhere else anyway.
5. Home equity loans
Home equity loans allow people to borrow money by using their home as collateral. The amount you’re able to borrow is determined in part by how much equity you have in your home. You can estimate this number by subtracting how much you owe on your mortgage from the current market value of the property.
If you receive a home equity loan in a lump sum, you could use those funds to pay down other debts, including credit cards.
Home equity loans usually have a fixed rate, which means the rate won’t change over time. But it’s worth confirming before accepting a loan. If you’re considering a home equity loan, it also helps to examine whether there are other fees and costs that could make it more expensive than your original debt.
If you can’t pay your home equity loan, it could put your home at risk.
6. Home equity lines of credit (HELOCs)
HELOCs, on the other hand, usually have variable interest rates, which means payments could change from month to month. And unlike a lump-sum loan, HELOCs usually function like a credit card. But these types of loans can vary widely. Specifics like when and how you can borrow money and the repayment terms can be unique to your loan.
Like home equity loans, HELOCs could put your home at risk if you are unable to pay. It’s wise to carefully examine and understand the details of each method before accepting one.
Consolidating credit card debt FAQ
Here are some frequently asked questions about credit card debt consolidation:
What are the benefits of consolidating credit card debt?
There are a couple of notable benefits to consolidating debt.
First, you may be able to lower your payments by consolidating with a loan or a credit card that has a lower interest rate than your current accounts. Some credit cards even offer 0% introductory rates to start, but that rate may only last for a limited amount of time.
Credit card debt consolidation could also simplify the payment process. By grouping your balances together, it might be easier to make one payment each month and track your progress as you pay down your debt.
If you can snag a 0% introductory APR as part of a balance transfer, credit card consolidation could help you tackle your credit card debt and simplify your payments.
Is credit card consolidation a smart financial decision?
Like most financial decisions, it depends on your situation whether credit card consolidation is a good idea. In some cases, it can help credit card users find better interest rates and simplify payments.
To understand if consolidating credit card debt is the best option for you, take a realistic look at your finances. You should also examine the terms and conditions of any loan or new credit card you consider.
As the CFPB notes, credit card debt consolidation won’t eliminate your debt. And there’s a chance you could end up paying more in the end because of fees, interest and other factors. It may seem obvious, but you should only choose a debt consolidation plan that will help you save money. If you’re unable to find a solution that offers a lower interest rate or affordable monthly payments, it might not be the right option.
Does consolidating credit affect your credit score?
Credit card debt consolidation can affect people’s credit scores differently. How it affects you depends on your financial situation, the method you use to consolidate your debt and more.
If you want to see where your credit stands, you can get free copies of your credit reports from AnnualCreditReport.com.
CreditWise from Capital One could also help—and it’s free to everyone. It has a tool called the Credit Simulator that lets you explore the potential impact of your financial decisions before you make them. That includes things like taking out a personal loan or opening a new credit card to transfer balances.
Consolidating credit card debt in a nutshell
If paying your credit card bills is a struggle, consolidating credit card debt may offer a way to help you get back on track. From balance transfer cards to personal loans, there are a number of credit card debt consolidation options. However, debt consolidation isn’t an option for everyone, and it may not be the best option for you. Be sure to do your research before committing to any new credit card or loan.