Consolidating credit card debt: What to know

If you fall behind on your credit card bills and are watching interest charges build up, consolidating your credit card debt could be one way to simplify and lower your payments.

Consolidating won’t erase credit card debt, but it could reduce the number of monthly payments and be a way to reduce your interest rates. Learn more about how credit card debt consolidation works.

What you’ll learn:

• 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 credit card balance transfers, taking out a loan or tapping into your home’s equity.

• While credit card debt consolidation may be a helpful debt management option for some, it isn’t right for everyone.

• Credit card consolidation might be effective if it lowers interest rates or simplifies monthly payments.

When you need help consolidating credit card debt, you could 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. 

Services vary, but generally, a credit counselor works with you and your creditors to set up a debt management plan that lowers your monthly payment. Once the plan is set, you’ll make a single payment to the credit counselor, who will then make payments to your creditors on your behalf. Keep in mind that while your monthly payment may be lower, the total amount you owe won’t necessarily be reduced.

The Consumer Financial Protection Bureau (CFPB) recommends finding credit counselors through the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA). The CFPB also has a list of questions to help you find the right counselor.

A balance transfer credit card 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. You then make monthly payments toward the new card going forward. Typically, you can’t transfer balances from the same credit card issuer.

If you’re interested in this option, it’s worth considering how long the introductory interest rate applies to transferred balances—and whether the rate will apply to new charges you make. If the rate after the introductory period is higher than what you’re paying now, you’ll want to prioritize repaying the balance you transferred to avoid paying that higher interest rate.

Also keep in mind that some credit card issuers may charge a balance transfer fee that’s added to your transferred balance, which could increase what you owe in the long run.

You could also use a personal loan to pay off credit card debt. If you’re approved for a personal loan, the money you previously used for monthly credit card payments would then go toward paying off the personal loan.

Personal loans are typically unsecured loans, meaning they don’t require collateral for approval. But there may be other factors that determine whether you’re qualified. And if the rates you’re qualified for are higher than what you’re paying on your credit cards, consolidating your debt may not be the best option.

With a retirement plan loan, you borrow from your savings instead of from a lender to pay off credit card debt. Not every type of plan allows it, but it might be an option with the following types of retirement plans:

• 401(k) plans

• 403(b) plans and 457(b) deferred compensation plans

• Profit-sharing plans

There are several things to consider about retirement plan loans. If you fail to repay your loan on time and it goes into default, you may owe early withdrawal taxes and a 10% early withdrawal penalty. The same holds true if you leave your job or file for bankruptcy. You’ll still have to pay back the loan in full, and if you can’t, you may owe early withdrawal taxes and penalties.

A HEL allows you to borrow money to pay off credit card debt using your home as collateral. The amount you 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 property’s current market value.

HELs 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 HEL, it also helps to examine whether additional fees and costs could make it more expensive than your original debt. And if you can’t make your loan payments, it could put your home at risk.

HELOCs are another way to borrow money from your home’s equity to pay off credit card debt. Unlike HELs, HELOCs usually have variable interest rates, which means payment amounts could change from month to month. And unlike a lump-sum loan, a HELOC usually functions like a credit card. But this type of loan can vary widely. Specifics like when and how you can borrow money and the repayment terms can be unique to your loan.

Like HELs, HELOCs could put your home at risk if you are unable to make payments. It’s wise to carefully examine and understand the details of each method before accepting one.

According to the CFPB, there are a few things to try before applying for a loan or a new credit card to pay off your existing credit card debt:

• Talk to a credit counseling service. A credit counseling service can give you money management tips and advice specific to your situation. This may provide the tools needed to better manage financial obligations in the future. 

• Review your spending habits. While looking for a solution to pay off credit card debt, it’s helpful to understand how the debt was accrued in the first place. You may be able to pay down credit card debt without a credit card consolidation loan by building a budget that works for your lifestyle.

Consolidating credit card debt isn’t a guaranteed fix. And it may not be the best option for everyone. Here are some questions to ask when deciding whether you should consolidate credit card debt:

• Will it lower your payments? One benefit to credit card consolidation is that you may be able to lower your payments by consolidating with a loan or credit card that has a lower interest rate than your current accounts.

• Are you looking to simplify multiple payments? Credit card debt consolidation could simplify the payment process. Making a single payment each month might be easier to keep track of. And it could help you track your progress as you pay down your debt. 

The best way to consolidate your credit card debt depends on your personal financial situation. Factors that could affect the consolidation method you choose include your total amount of debt and the types of loans and terms you qualify for.

Here are some frequently asked questions about credit card debt consolidation.

If paying multiple credit card bills is a struggle, consolidating your credit card debt may offer a way to help you get back on track.

If you decide that consolidating credit card debt is the right move for your situation, a balance transfer may be a great place to start. There are several Capital One cards with low introductory rates. You can also monitor your credit score with CreditWise. It won’t hurt your credit scores, and it’s free, even if you’re not a Capital One cardholder.