A credit card can be a powerful tool for improving your overall financial health – when that card is managed well. But if you’re juggling multiple accounts with high interest rates, you may feel financially stuck. It’s hard to get out of debt if you’re only able to pay the monthly minimum on your cards.
If you want lower interest rates, relief from multiple payments and a potentially faster route out of debt, consider credit card debt consolidation: That’s the process of combining multiple credit card balances into a single loan or payment, typically at a lower annual percentage rate (APR).
Read on to learn about the best ways to consolidate credit card debt to help you improve your finances and get you out of debt faster.
Key Takeaways
- Credit card debt consolidation can help you get out of debt by providing a lower-interest loan or line of credit.
- Balance transfer cards, personal loans, debt management plans and home equity loans or lines of credit are the most common tools for debt consolidation.
- It’s possible to improve your credit score when you consolidate credit card debt.
- Consolidating your debt can help by turning multiple payments into a single monthly bill, which may be easier to track within your budget.
How Does Credit Card Debt Consolidation Work?
According to Experian, consumers have an average of 3.7 open credit card accounts. Imagine your balances are $5,000, $3,000 and $10,000 across three cards: With a credit card consolidation loan or line of credit, you could borrow $18,000, pay off your original credit card balances, and then repay it under the new lender’s terms. If the APR on your loan is lower than the APR on your cards, you would pay less in interest over the lifetime of the loan.
As an example, let’s say all your current credit cards have a 22% APR and a $540 minimum payment each month.
If you continued making those payments, it could take a bit over 4 years to pay off $18,000, incurring roughly $10,000 in interest along the way. A 5-year personal loan with a 12% APR would cost you much less. You could pay approximately $400 a month and incur roughly $6,000 in interest over the lifetime of the loan.
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4 Ways To Consolidate Credit Card Debt
If you want to consolidate your credit card debt, there are four common ways to approach it. Each comes with different requirements and potential fees, so you’ll want to look at the overall costs of each option compared to your current debt.
- Balance transfer credit cards (0% intro APR): Move your balances to a balance transfer card with a 0% promotional rate (which could last anywhere from 12 to 21 months, depending on the offer). That interest rate could jump dramatically higher after the intro period, however, so this strategy works best if you can pay it off in time without using the card for new purchases.
- Personal loans (debt consolidation loans): A personal loan is an unsecured loan that doesn’t need collateral (though having collateral or a co-signer may improve your terms). You can use it to pay off your credit cards, streamlining debts into one fixed-amount, monthly payment.
- Home equity loans and home equity lines of credit (HELOCs): These options let you tap the equity in your home, which is its appraised value minus what you still owe on your mortgage. But you can’t borrow it all. Most lenders cap your combined mortgage and new loan at 80% to 85% of the appraised value, known as the loan-to-value ratio (LTV). For example, on a $400,000 home with a $250,000 remaining mortgage and an 85% LTV cap, your total borrowing limit would be $340,000, so you could borrow around $90,000. If you’re interested, these products differ. Home equity loans typically come with fixed rates, and you get a lump sum payment. HELOCs usually have variable rates and provide a revolving line of credit with a draw and a repayment period. If you use either of these options, you risk losing your home if you default, because it acts as collateral.
- Debt management plans (DMPs): A nonprofit credit counseling agency can offer you a DMP that rolls all of your credit card debts into one monthly payment. No credit score is required, making it accessible when other options aren’t. Your first stop should be the National Foundation for Credit Counseling: Experts there can help you decide if a DMP will work for you. One note: Creditors aren’t required to participate, but most major card issuers will consider it.
An Overview Of Common Credit Card Debt Consolidation Tools*
| Method | Eligibility | Costs | Pros | Cons | Best For |
|---|---|---|---|---|---|
| Balance transfer cards | 670+ credit score | 3% to 5% of the total balance as a transfer fee | 0% APR for up to 21 months | Rate increases after promotional timeline; lower credit limits | Balance amounts you can pay off within the 0% APR window |
| Personal loan | 580+ credit score | Interest rate; origination fees can be 1% – 5% depending on the lender | No collateral required; fixed payment, nonrevolving debt; borrow up to $100,000 | Higher rates for lower credit scores | People who want a fixed payment schedule and have consistent income |
| Home equity loan or HELOC | 680+ credit score and enough equity in your home | 3% to 6% closing costs; HELOCs may carry other fees | Lower interest rates than a personal loan; larger borrowing limits | Home acts as collateral for the loan | Homeowners with equity and strong credit scores |
| Debt management plan | No credit score needed | Small fee; amount depends on the agency | One monthly payment, may be possible to pay off debts in 3 – 5 years | Must close all your current cards | Large sums of debt; poor credit |
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Is Consolidating Credit Card Debt Right For Your Situation?
If you have a steady income, a solid plan to conquer your debt and qualify for a lower interest rate (at least one that’s lower than your credit cards), consolidating your credit cards into one payment could be a good choice.
On the other hand, credit card debt consolidation isn’t always your best line of defense, and you may need to use some of the alternative methods listed further below.
Warning signs that consolidation alone won’t get your finances into better shape include:
- You are using your credit cards because your expenses exceed your income. If you can’t afford basic living necessities without using credit, the problem is beyond credit card spending.
- You are consolidating credit card debt to free up credit lines for a big expense or event.
- You have a problem with overspending.
- You have severe financial hardship, such as mounting medical debt or a job loss, and cannot afford to make payments on a new loan.
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How To Consolidate Credit Card Debt Step-by-Step
Step 1: Gather every credit card statement and list each balance, interest rate and minimum payment. A free online payoff calculator can help. Run the minimum payments first. Then, if your budget can support a higher amount, run that figure too. Compare how long it will take to pay off each card at the minimum payment versus a larger one. A consolidation loan should save you money on the debt overall, not just on the monthly payment.
Step 2: Your credit score and debt-to-income (DTI) ratio will be factors in determining what kind of loan or credit card you can qualify for and how much a lender may allow you to borrow, so it’s important to check both before applying.
Many credit card issuers and banks now offer free credit score access if you ask. To calculate your DTI, add up your total monthly debt payments, like rent or mortgage payment, student loans or credit card payments and divide that figure by your gross (pretax) monthly income. Take that figure and multiply by 100 to get a percentage. Online DTI calculators can do the math for you.
Step 3: Whenever you are looking for a loan, consider prequalifying with multiple lenders, who use a soft pull on your credit report. Doing so won’t impact your credit, so it’s safe to shop around.
Step 4: Look at the options you actually qualify for and consider each one’s up-front fees and the total interest you’ll owe over the full repayment period against the timeline and amount you plan to borrow. The best fit could be an option with the lowest overall total cost that still delivers the money in the timeframe you need.
Step 5: Creating a payoff plan for your debts can help, as can automating your payments so that you don’t fall behind or get tempted to skip when money is tight. If you are living paycheck to paycheck or become unemployed, you may want to reconsider automating payments to avoid fees if you become overdrawn. It can help to review your consolidation loan, and if you find you are having trouble making payments, reach out to your lender or credit card issuer.
How Credit Card Debt Consolidation Impacts Your Credit Score
Consolidating your credit card debt can affect your credit score. First, just applying for a new loan or line of credit can lower your score by about five points.
However, the long-term impacts often outweigh the downsides. As you pay off your cards, your score will rise, and adding on-time payments to a new loan builds a positive payment history, which is the biggest factor of your score – 35%.
Alternatives To Consolidating Credit Card Debt
There are other ways to pay down credit card debt that might work best for you.
Pay Off Credit Cards Yourself
There are two popular approaches to paying off credit card debt: the snowball and the avalanche methods. With the snowball approach, you pay off the smallest debts first, then redirect those payments to the next card. The avalanche works in a similar way but you start with the highest interest rates then work your way down.
Request Hardship Assistance
Call your creditor and ask for hardship assistance. If you qualify – common reasons are a job loss, serious illness, divorce or a military obligation – your creditor may reduce monthly payments, lower your interest rates or allow you to defer payments.
Bankruptcy
Most experts agree that filing for personal bankruptcy should be your last resort. There are two kinds: Under Chapter 7 – where you sell some assets to pay off debts – credit card debt can be discharged. If you use Chapter 13, your debts are paid off according to a court-ordered plan. Both kinds are highly damaging to your credit score.
FAQ
The Bottom Line: Credit Card Debt Consolidation Can Help You Lower Debt
The best methods for consolidating credit card debt will depend on your personal situation, such as your credit score, income, equity and other factors. If you have serious financial trouble or can’t control your spending, you might consider credit counseling. In many cases, though, consolidating credit card debt can help you get out of debt for good.
Ready to explore your options? Compare personal loan options and find a rate that could help you pay down debt faster.
Maya Dollarhide
Maya Dollarhide is a freelance writer with over a decade of experience covering personal finance topics. Her writing credits include AARP, Bankrate, Investopedia, CNN.com, Yahoo Finance and Lending Tree. She enjoys writing articles and producing multimedia content that helps individuals and families make informed decisions about their money, from mortgages and home loans to reducing credit card debt and saving for retirement. She has also created educational materials for use in schools to teach young people about personal finance, from opening up a bank account to saving for college and beyond.
