How to Consolidate Credit Card Debt

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BY Rebecca Lake
Jan 25, 2022
 - Updated 
Jun 13, 2024
Key Takeaways:
  • Credit card consolidation means combining balances into one loan or program with a single monthly payment.
  • You may consolidate credit cards with a personal loan, home equity loan, balance transfer card, or debt management plan (DMP).
  • Debt settlement can be an option when debt consolidation is not affordable.

Credit card consolidation simply means replacing two or more credit card balances with one new account. Credit card consolidation loans may offer some advantages: 

  • Replacing several payments with one makes it easier to pay on time.

  • You could lower your interest rate, monthly payment, or both.

  • Credit card consolidation may help raise your credit score. 

However, some loans are better for credit card consolidation than others. 

What Are Credit Card Consolidation Loans?

A credit card consolidation loan is financing for consolidating credit card debts. You use the proceeds to pay off your credit card balances. You then make one monthly payment to clear your total credit card balances.

There are different ways to consolidate credit card debt. The most popular options include home equity loans, home equity lines of credit (HELOCs), personal loans, and balance transfers. 

Home equity loan

A home equity loan is a mortgage that uses the equity in your home as security. Equity is the difference between your current property value and the total of all loans secured by your property.

Home equity lenders usually offer loans with fixed interest rates. These are lump-sum loans that can be used for virtually any purpose, including credit card consolidation. You'd then pay back the loan, with interest, in addition to your regular mortgage payment.

Home equity loans could be a good option for homeowners who have enough equity in their homes to borrow against and are interested in a fixed-rate loan option. You'll also need to have a good credit score and reliable income to qualify.

Home equity line of credit (HELOC)

A home equity line of credit is similar to a home equity loan. You also borrow against your home equity. But there are some significant differences in how you receive your loan proceeds and repay your balance.

With a HELOC, you get a revolving line of credit that you can draw against as needed. Think of it as a credit card that's secured by your house. The upside of this is that you only pay interest on the amount of your credit line you use. HELOCs typically have variable interest rates. 

Both HELOCs and home equity loans use your home as collateral. If you can't make the payments, your lender could foreclose on the property, and you could lose your home.

Personal loan

Personal loans or personal installment loans allow you to borrow a lump sum of money for credit card consolidation and pay it back at a (usually) fixed interest rate. Most personal loans are unsecured, but there are also secured personal loans. You may be able to improve your chances of loan approval or get better terms with a secured personal loan.

The amount you can borrow can depend on the lender's guidelines, your credit scores, and your income. For example, some lenders cap personal loans at $35,000, while others might allow you to borrow as much as $100,000.

You'll need to have a higher credit score to get the best interest rate on a personal loan. There are personal loans for bad credit, but those can carry much higher interest rates. 

One good thing about using a personal loan for credit card consolidation is that you don't need to borrow against your home. You wouldn't need any collateral at all if you're applying for an unsecured personal loan. 

Balance transfer

A balance transfer involves transferring balances from one or more credit cards to a new credit card, typically at a 0% APR. A balance transfer can help you consolidate your balances and save money on interest. 

Similar to personal loans, you'll need goo- to-excellent credit to access the best balance transfer offers. This means a balance transfer credit card with a 0% APR and an introductory rate period that fits your needs. The intro period can last anywhere from 6 to 21 months or more, depending on the card.

Balance transfers could work well for consolidating credit card debt if you're able to repay the balance in full before the promotional period ends. It's also important to factor in the balance transfer fee. That fee usually runs between 1% and 5% of the amount transferred. 

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. It's easy to compare balance transfers from different card issuers online. As you're comparing offers, you'll want to pay attention to:

  • Introductory balance transfer APR

  • How long the introductory APR period lasts

  • Balance transfer fee

  • Regular variable APR that applies once the promotional period ends

The introductory time frame matters because you should be relatively sure to pay off the balance before the regular APR kicks in. You can quickly figure out how much you need to pay by dividing the balance by the number of months. So if you're transferring a $5,000 balance to a card with an 18-month introductory period, you'd need to pay $278 a month to pay it off in time. 

Once you find the right card, the next step is applying for it. Most balance transfer cards allow you to apply online. Avoid applying for cards that don't cater to people with your credit rating because every inquiry generated causes your credit score to drop a few points. 

You'll be asked which balances you'd like to transfer during the application. You'll need to share your credit card account number and the balance amount. The issuer for the new card will then handle the details of transferring the balance for you.

After the transfer is complete, think carefully about closing your old cards. Closing the cards you transferred balances from could affect your credit utilization ratio. This is the amount of your available credit you're using at any given time, and it counts toward 30% of your FICO credit score. In addition, closing accounts lowers the average age of accounts, which makes up 15% of your credit score.

Don't consolidate your credit cards yet if you think you might run up your balances again before paying off the balance transfer card. You need to address your spending problems with a trained professional first.

Personal Loan for Credit Card Consolidation

Personal loans can be helpful for credit card consolidation if your main goal is combining your debts so that monthly payments are more manageable. You're less likely to find a personal loan that offers a 0% APR but personal loan rates are on average about 7% lower than credit cards if you have good credit.

When comparing personal loans, it's essential to look at:

  • APR and interest rate

  • Repayment term 

  • Fees that may apply, if any

Personal loan terms are fixed, so you know exactly how many payments you'll need to make. For example, you might repay your loan over 24 months, 36 months, or 60 months, depending on how much you borrow. 

Your monthly payments may be higher than what you're used to if you previously only made the minimum payment due on your credit cards. Getting a free personal loan rate quote can give you an idea of what your monthly payment might be. You can then compare that number to your monthly budget to determine what you can realistically afford. 

Take Out a Home Equity Loan for Credit Card Consolidation

Home equity loans allow you to tap into home equity. The more equity you have, the more you might be able to borrow for credit card consolidation. Fixed interest rates mean your monthly payments are predictable, making budgeting easier. And payments tend to be low since loan terms may extend from 10 to 20 years. 

Like any other mortgage, closing costs are involved when getting a home equity loan. Closing costs tend to run between 2% and 5% of the loan amount. For that reason, a home equity loan may only be worthwhile if you need to borrow a larger amount of money. 

Also, while home equity loans can offer lower interest rates, you might still end up paying more interest if you take longer to repay your balance. For instance, if you have a credit card with a 17% interest rate and your payment is $200 per month, you'd pay it off in 7.3 years with a total of $7,518 in interest charges. If you took a home equity loan at 7% and repaid your loan over 20 years, the payment drops to $78, but you'll pay $8,607 in interest. For maximum savings, it's best to pay off a home equity loan as quickly as possible.

Credit Card Consolidation With a HELOC

Home equity lines of credit have variable interest rates attached to an index or benchmark rate. As long as this benchmark rate remains low, so do HELOC rates. It's possible to find HELOCs with lower rates than home equity loans or personal loans. 

This type of credit card consolidation loan may have closing costs, but they could be less than you'd pay for a home equity loan. In some instances, they may even be zero. So you might consider a HELOC in place of a home equity loan if you're interested in borrowing a smaller amount of money. 

The biggest potential downside is the variable rate. If interest rates rise steeply, then your HELOC can become more expensive. If rates go up and stay up, then you may not realize much interest savings at all by consolidating credit cards with a home equity line of credit. 

DIY debt consolidation

If you’re up to the challenge, you could handle your debt payoff strategy on your own without a new loan. Getting out of debt usually isn’t fast or easy, but all of these strategies have worked for someone else in the past and might work for you. 

  • Debt snowball method: Make a list of all your debts and how much you owe on each one. Put them in order from smallest to largest. Make the minimum payment on all the debts except the smallest one. On that one, pay as much as you can every month until it’s gone. Then focus your attention on the next smallest debt. The snowball method helps you get your first debt paid off quickly, and that’s a great feeling that could motivate you to continue. 

  • Debt avalanche method: Rank your debts according to the interest rates and focus paying off the one with the highest rate first. Make minimum payments on the other debts while you put everything you’ve got toward your most expensive debt. This method could help you save on interest charges.

DIY debt consolidation puts you in control of your finances while you work toward debt freedom. Payoff strategies could help you learn valuable financial skills while you pay off your debts. You’ll build confidence and become more aware of your budget. 

Credit counseling services to consolidate payments

Credit counseling is for people who could use a little professional guidance when it comes to debt, credit scores, and money management. A credit counselor could help you come up with a financial plan that works for your life, and offer moral support along the way. 

Here’s how it works:

  • The credit counselor looks at your income, expenses, debts, and goals. Together, you’ll make a plan to manage your debt.

  • Together, you’ll make a budget that works for you.

  • You’ll check in regularly to ask questions and let your credit counselor know how you’re doing. Your credit counselor shouldn’t judge or shame you. If you don’t stick to your budget, your counselor can encourage you to start again. If you have a great month, your counselor can congratulate you.

To find a credit counselor, start by looking online for agencies accredited by the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA). Credit counselors are available in person, on the phone, or by video visit. There may be a monthly fee, but the service is designed to be affordable for anyone who needs it. 

Using a Debt Management Plan to consolidate debt

If you’re struggling with your unsecured debt and you need a structured plan to pay it off, your credit counselor may be able to set up a debt management plan (DMP) for you. This is a plan to pay off all your unsecured debts in three to five years. You’ll probably be asked to stop using credit cards while you’re in the plan. 

You’ll list all of your debts and the credit counselor will reach out to your creditors. Usually, your creditors will agree to participate in the DMP because it means you’ll be working on paying your debts. They may agree to waive certain fees or even lower your interest rate to make the payment a little more affordable. 

Then you’ll make a single monthly payment to the credit counseling agency and they’ll distribute the money to your creditors. If you miss payments, your creditors may pull out of the plan. 

The main downside of a DMP is that the monthly payment can be high.

A DMP isn’t a quick fix, but it could be a way to pay off your debts while getting a handle on your finances.

Credit Card Consolidation Dos and Don'ts

If you're interested in credit card consolidation, know what you should (and shouldn't) do to avoid costly mistakes. Remember to:

  • Shop around for the best offer 

  • Address spending problems before consolidating credit card debts

  • Choose the correct type of loan for your needs

  • Pay off your credit card consolidation loan as soon as you can

And in terms of the don'ts

  • Avoid carrying balances in the future if possible

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

  • Protect your credit score by keeping your credit utilization low in the future

Credit card debt consolidation is not magic. It does not reduce the amount that you owe. However, lowering the amount of your payment that goes toward interest should allow you to pay down your principal balance faster and save you money.