Credit Card Debt Consolidation Options

Ever feel like you’re stuck in a never-ending cycle of debt? If you’re one of the millions of Americans who carries multiple credit card balances month to month, you might find it difficult to keep track of your interest rates and stay up to date on your multiple payments. If you’re wondering how to get out of credit card debt, you may not even know where to begin—especially if you’re only making minimum payments each month.

Credit card debt consolidation—making one payment to one company every month instead of worrying about multiple cards—could help simplify your payment schedule, reduce your interest rate, and get you out of debt faster. Basically, you manage credit card debt by rolling all of your existing high interest balances into a single account that has a lower interest rate.

Some of the most common ways to consolidate credit card debt are explained below. The method you choose will depend on your current financial situation, how much you can afford to pay each month, and other factors.

1. Take out a debt consolidation loan

One of the most well-known credit card debt consolidation methods is to take out a debt consolidation loan, which is a type of personal loan that you use to pay off all of your credit cards at once. Then, you only have to make payments on a single loan each month, which simplifies your monthly expenses.

With rates ranging from 4 to 36 percent and terms from two to seven years, a debt consolidation loan could help you get out of debt faster and save on interest—but only if you can qualify for a low enough rate and pay it off quickly. While taking out a loan with a short payoff term is ideal, the shorter the term on the loan, the higher your monthly payments could be.

Most lenders offer debt consolidation loans between $1,000 and $40,000. Be aware that, depending on your lender, you may be charged an origination fee of up to 5 percent of the loan’s value to pay for processing. Before agreeing to a loan, read your entire loan contract and understand all fees your lender might charge. Most importantly, do your research to ensure that the lender you choose has the right rate, term, and service for you.

Before you take out a debt consolidation loan, make sure you can afford your new monthly payment.

Should you get a debt consolidation loan?

If you have debt on several credit cards and want to simplify your payment schedule, credit card debt consolidation using a loan could be right for you. It could help you pay off your debt in less time and save on interest, but only if you qualify for a rate that’s lower than the average rate you’re currently paying. In order to qualify for a lower rate, you need a good to excellent credit score, a manageable debt-to-income ratio, and a steady source of income.

Before you take out a debt consolidation loan, make sure you can afford your new monthly payment. For example, if you have $15,000 in credit card debt and get a debt consolidation loan with a rate of 12.5 percent APR and a term of three years, your monthly payment would be $836.34. This could be nearly double what you would pay if you had the same amount of debt with an average credit card interest rate of 16.99 percent. If you’re already struggling to make minimum payments, it may not be the best option.

2. Transfer debt to a balance transfer card

Balance transfer cards are a credit card debt consolidation method you might consider as an alternative to a personal loan. These cards allow you to transfer all of your current credit card debts onto a new card with a low promotional rate. With rates as low as 0 percent for an average period of 16 months, you could avoid paying interest and focus on paying down your principal debt.

While balance transfer cards let you consolidate your debt at a significantly lower interest rate for a short period, the rate goes back up after the promotion ends. Also, depending on the card, you may end up paying a transfer fee of 3 to 5 percent. This might not seem like a lot, but if you’re in $15,000 in debt, you could end up paying $450 to $750 just to transfer your balances.

Is a balance transfer card right for you?

If you have enough money to pay off your debt in a very short amount of time, a balance transfer card could be the best credit card debt consolidation option for you. It’s also a good choice if you have a low debt amount, high interest rates, and the income to pay it off before the promotional period ends.

Make sure to do your research. Widely available online credit card reviews should explain the promotional rate, how long the rate lasts, and how much you’ll pay in fees to transfer your balance.

3. Take advantage of your home equity

If your home’s value is higher than your current mortgage balance, you may be eligible to take additional money out of your home and use it to pay off debt. The two main ways to use your home equity for credit card debt consolidation are cash-out refinance and home equity line of credit.

Cash-out refinance

With a cash-out refinance (or “refi”), you refinance your mortgage and take out up to 85 percent of your home’s loan-to-value ratio, using it to consolidate your credit card debt. Then you simply pay your mortgage like you normally would, except now your outstanding credit card balances are rolled into each payment. Since rates are typically lower on secured debt like a mortgage, you could potentially save money interest. You’ll have more time to pay off the debt, too, because mortgage lengths typically vary from five to 30 years.

Home equity line of credit (HELOC)

A home equity line of credit (HELOC) is another type of loan that uses your home as collateral. Unlike a cash-out refi, a HELOC allows you to take out money over time instead of all at once. Typically, the draw period ranges from five to 10 years, after which you typically have 10 to 20 years to pay it off. Similar to cash-out refis, a HELCO enables you to take out anywhere between 85 and 90 percent of your home loan-to-value ratio, which could give you a much lower rate and more time to pay it off.

Should you use home equity for credit card debt consolidation?

If you have enough equity in your home, a HELOC or cash-out refi could be the right way for you to consolidate credit card debt. By transferring your unsecured credit card debt over to a secured loan, you could dramatically reduce what you pay in interest over time on that debt.

However, since you’re also adding to your mortgage, your monthly payments could go up. Plus, taking out a new mortgage resets the clock on your debt repayment, so you may be in debt for a longer time. Make sure that you’re able to afford these payments over the entire payoff period, otherwise you could risk losing your home.

4. Sign up for a debt management plan

If you’re dealing with multiple high-interest credit cards, a credit counseling agency may have the right credit card debt consolidation solution for you. It’s called a debt management plan (DMP), and it could reduce your interest rates to a manageable level. Credit counseling agencies are typically nonprofit organizations that offer financial education services, budgeting help, and DMPs for eligible clients.

To be eligible for a DMP, your debt must be 15 to 49 percent of your annual income and you’ll have to prove that you would be able to pay off the debt at a reduced interest rate. You make monthly deposits into an account that your credit counseling agency will use to pay your creditors. Depending on the agency, your creditors, and other factors, a DMP could reduce your interest rates by 8 to 25 percent and help you get out of debt in about 60 months.

By reducing the principal owed, debt settlement could be a faster, more affordable debt solution than a DMP.

Is a debt management plan right for you?

A debt management plan could help you reduce your interest rates, but only if you are eligible. You’ll pay a monthly fee on top of your monthly DMP deposits, which may not be as expensive as a debt consolidation loan, but you may have to pay more than your current minimum payments. If you’re worried about paying off your debt because your interest rates are too high but could afford to pay more than your minimum monthly payments, a DMP may be the right credit card debt consolidation option for you.

5. Reduce your credit card debt with help from a debt settlement company

Debt settlement, which is the solution that the Freedom Debt Relief program offers, could be the right option for credit card debt relief if you have more than $10,000 in debt. In this process, you work with a company that negotiates directly with your creditors to get them to accept less than you owe on your debt. By reducing the principal owed, debt settlement could be a faster, more affordable debt solution than a DMP through credit counseling.

How the debt settlement process works

Similar to credit card debt consolidation loans and DMPs, through debt settlement, you make monthly deposits into a special purpose account that you own. These funds will be used later, to pay debts with your creditors after the company has negotiated with them to reduce how much you owe.

While you deposit money into your account, debt negotiators contact your creditors and negotiate with them to reduce the amount you owe. Once you sign off on the negotiated terms, the funds in your account are paid to the creditor according to the agreement, and the debt settlement company collects their fee. This process continues with each of your creditors until all of your credit card debt is resolved. This takes from 24 to 60 months, depending on your creditors, how much you owe, and other factors.

Is debt settlement right for you?

If you’re considering credit card debt consolidation because you have more than $10,000 in credit card debt, a debt settlement program could be right for you—especially if you’re feeling debt stress and starting to fall behind on your monthly payments. Since these programs could get you out of debt for a less than you originally owe, you could end up saving more money and becoming debt-free faster than other methods.

However, since you stop making payments while building up the funds to settle your debt, your credit score may be negatively affected, and you may be at risk for collection calls and lawsuits.

Before you commit to any debt settlement or debt relief company, it’s important to compare your options and make sure that you find the right one for you.

Get started chipping away at your credit card debt

If you’re struggling to keep up with credit card payments and worried about how you’ll pay off your balances, credit debt consolidation may help. However, it’s not the only solution and may not necessarily be the right one for you. Freedom Debt Relief is here to help you determine the best path to financial freedom. Our Certified Debt Consultants can explain your options, including our debt relief program. You can find out if you qualify today.