How to Consolidate Credit Card Debt

Debt consolidation is a way to streamline your debts and hopefully lower the cost. Credit card consolidation combines your balances into one loan or program with a single monthly payment. The idea is to make your budget more manageable. There are multiple ways to consolidate debt. The right approach depends on your credit, your goals, and how much you owe.

What Are Credit Card Consolidation Loans?

A credit card consolidation loan is a loan to pay off your credit card balances. You make a payment toward the consolidated debt once a month, like you would for a personal loan.

You might consolidate credit card debt in many ways. Popular options include home equity loans, home equity lines of credit (HELOCs), personal loans, and balance transfers.

Compare Your Full List of Credit Card Consolidation Options

You might borrow from your retirement account, enroll in a debt management plan, or attempt to negotiate debt settlement. Each method fits a different financial situation.

Steps to Get Ready for Credit Card Consolidation

From listing debts to limiting new credit card charges, here are four steps to prepare you for applying for a consolidation loan.

1. List your debts. Write down every balance, due date, and interest rate. Also take note of the current monthly payment for each debt.

2. Check your credit. Review your credit score and credit reports to learn which options you may be eligible for. Some creditors only approve loans above a certain credit score.

3. Compare offers. Review the interest rate, fees, and total cost of each option before you choose one. Though a longer term might mean you make smaller monthly payments, shorter terms tend to cost you less interest overall.

4. Limit new charges. Hold off on new charges on cards you plan to pay down. New charges could offset your progress and make you ineligible for a loan.

Home Equity Loan for Credit Card Consolidation

A home equity loan gives you access to the equity in your home. The more equity you have, the more you can apply to borrow. Fixed interest rates keep your monthly payment predictable. Budgeting becomes easier. And payments tend to be low because loan terms may extend from 10 to 30 years.

Like any other mortgage, a home equity loan involves closing costs, typically 2% to 5% of the loan amount. It’s best suited for large loans.

Though home equity loans typically offer lower interest rates than credit cards or personal loans, the savings depend on repayment speed. You could end up paying more interest overall if you take longer to repay your balance.

Home equity loan payment example

Imagine you have a credit card with a 17% interest rate and a $200 monthly payment. You'd pay it off in 7.3 years and pay $7,518 in interest charges. 

Now imagine you took a home equity loan at 7% and repaid it over 20 years. Your payment would drop to $78 a month, but you'd pay $8,607 in interest overall. 

Pay off a home equity loan as quickly as possible. The longer you stretch it, the more total interest you’ll pay, even if the rate is better than your credit cards.

Credit Card Consolidation With a HELOC

Home equity lines of credit usually have variable interest rates that rise and fall over time. This type of credit card consolidation loan may have closing costs. Consider a HELOC if you want the flexibility to borrow, repay, and borrow again for the first few years of the loan. 

The biggest potential downside is the variable rate. If interest rates rise steeply, then your HELOC will become more expensive. If rates go up and stay up, then you may not realize much interest savings by consolidating credit cards.

Personal Loan for Credit Card Consolidation

Personal loans work well for credit card consolidation when you want to combine multiple debts into one manageable monthly payment. Personal loan rates tend to run lower than credit card rates.

When you compare personal loans, review:

• APR and interest rate

• Repayment term

• Fees that may apply, if any

Since personal loan interest rates and terms are fixed, you know exactly how many payments you'll need to make. You may choose to repay your loan over 24 months, 36 months, or 60 months. This is a choice made upfront, while shopping for offers.

If you usually only make minimum payments on credit cards, your new monthly payments may be higher than what you're used to. A free quote gives you an idea of what your monthly payment might be. You can usually source a quote by prequalifying. Compare that number to your monthly budget to find out what you could realistically afford.

401(k) Loan for Credit Card Consolidation

A 401(k) loan is a loan against your retirement account balance. The advantage of a 401(k) loan to pay off credit card debt is that perfect credit isn't a requirement. If your job is stable and your plan allows loans, you can apply without a credit check. If approved, the interest you pay on the loan goes back into your retirement account, instead of to a lender. 

The disadvantages are the loss of growth in your retirement account, and the potential for tax penalties. When you borrow from your retirement plan, any money you take out misses a chance to grow through compounding interest. You may not be able to make new contributions to your plan either, until the loan is paid off. That could result in a smaller nest egg.

On top of that, you could face tax penalties if you don't repay the loan within five years. Or, if you change jobs. Any remaining balance on a 401(k) loan is due in full when you leave your employer. If you can't pay up, the IRS treats the amount withdrawn as a taxable distribution. This could mean a big tax bill when it's time to file.

Consolidate Credit Cards With a Balance Transfer

To consolidate credit cards with a balance transfer, you'll first need to choose a new card to open. Balance transfer offers are simple to compare online.

As you're comparing offers, you'll want to pay attention to:

• Introductory balance transfer annual percentage rate (APR)

• How long the introductory APR period lasts

• Balance transfer fees

• Variable APR that applies once the promotional period ends

The introductory time frame matters, since you'll want to pay off the balance before the regular APR applies. Figure out your target payment by dividing the balance by the number of months: for example, divide a $5,000 balance by an 18-month introductory period to get $278 per month.

Once you find the right card, apply for it online. Avoid cards that don't fit your credit profile, since each inquiry could drop your credit score a few points. Be prepared to fill in the account number and amount for each balance you'd like to transfer. The new card's issuer uses this information to handle the transfer.

Do you close your credit cards after a balance transfer?

Whether to close the paid-off cards after you transfer the balances depends on your situation. Short answer: close the cards if doing so could help you conquer your debt. Or, close cards if you don’t need the extra credit card accounts. 

If you leave the cards open, you could potentially improve your credit utilization ratio. Credit utilization, the amount of your available credit you're using at any time, heavily influences your FICO credit score. 

On the other hand, there’s a real risk of running a balance back up. If nothing changes, the cards you freed up could once again be racking up debt. Before you know it, you could be in even more debt than you started with.

If you close the paid-off cards, your average account age could go down. This could damage your credit. That said, you free yourself to address the debt you already have. Paying off the new balance transfer card could improve your credit standing, so the effect on your credit score could be a wash. Even if closing the paid-off cards temporarily dings your credit scores, don’t be afraid to do it if it puts you in a financial safety zone, one that lets you focus on your existing debt.

Generally speaking, dealing with debt and putting yourself on firm financial footing should take priority. Great credit flows naturally from great financial management. Great management includes getting rid of credit card debt. 

Enrollment in a Debt Management Plan to Consolidate Payments

Credit counseling is for when you need professional guidance for unsecured debt, credit scores, and money management. 

Here's what happens:

• The credit counselor evaluates your income, expenses, debts, and goals to determine whether you qualify for a debt management plan (DMP). 

• If you qualify and enroll, the counselor will negotiate with your unsecured creditors. The point is to reduce the interest rate you pay or waive certain fees. It’s common for creditors to agree to these kinds of concessions while you’re in a DMP.

• You’ll make monthly payments timed to fully pay off your enrolled debts within three to five years. 

• If you miss a payment, your creditors could back out of the agreement. That means they stop making concessions.

• You'll check in regularly to update your counselor on your progress. Your credit counselor may be able to help you with budgeting.

The main downsides are that the monthly payment may be high and there is no debt forgiveness.

Credit counselors are available in person, by phone, or by video. Often, for an affordable monthly fee.

Credit Card Consolidation Dos and Don'ts

If you're interested in credit card consolidation, remember to:

• Shop around to compare loan offers

• Make sure the proposed monthly payment fits your budget before you consolidate

• Choose the correct type of loan for your needs

• Pay off your credit card consolidation loan as soon as possible

Things to watch out for:

• Avoid new balances if possible

• Remember that your debt doesn't go away just because you consolidate it

• Protect your credit score. Avoid credit card debt going forward.

Credit card debt consolidation is not financial wizardry. It doesn't reduce the amount you owe. If a smaller share of your payment goes toward interest, you could pay down the principal balance faster and save money over time.

Which Credit Card Consolidation Option Fits Your Situation?

Consolidation tends to work well when you can fully repay your debts, you find a loan or card with a lower rate than what you're paying now, and you want one predictable payment. 

What If You’re Already Behind On Payments?

If consolidation isn't affordable, or if you're already behind on payments, debt settlement might be a viable way to get credit card debt relief. 

Debt settlement means negotiating with your creditors to accept less than your full balance. This is something creditors may consider if you've fallen behind on payments already.

Debt settlement is an option for unsecured debt, such as:

• Credit card balances

• Medical bills

• Most personal loans

• Payday loans

• Store card balances

• Collection accounts

• Unpaid utility or cell phone bills

You can negotiate your own debts for zero fees. Or, you might work with a professional debt settlement company like Freedom Debt Relief, which handles negotiations.

Debt settlement may negatively impact your credit.