How to Consolidate Credit Card Debt

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

Steps to Get Ready for Credit Card Consolidation

These steps help you prepare before you apply for any consolidation option.

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.

3. Compare offers. Review the interest rate, fees, and total cost of each option before you choose one.

4. Limit new charges. Hold off on new charges on cards you plan to pay down, since new charges could offset your progress and affect your eligibility.

What Are Credit Card Consolidation Loans?

A credit card consolidation loan is a new loan that you use to pay off your credit card balances. You then make one monthly payment to the loan.

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 second mortgage that allows you to borrow against your equity, using the home as security. Equity is the difference between your estimated home value and current mortgage balances. 

Home equity loans provide a lump sum of funding you can use however you like. These loans usually have a fixed interest rate and you repay them monthly in addition to your regular mortgage payment. Repayment terms may last 10 to 30 years. 

This option could be a good fit for homeowners with enough equity to borrow against, a good credit score, and reliable income to apply.

Home equity line of credit (HELOC)

A home equity line of credit is another way to access equity using your home as security. You get a line of credit that lets you borrow, repay, and borrow more, as often as you like during the initial draw period, which may last five to 10 years. Once the repayment period begins, you can’t borrow more. 

HELOCs usually have variable interest rates, which means your rate could rise or fall over the loan term. Rate changes can in turn increase or decrease your monthly payments. (Fixed-rate HELOCs exist, as well as HELOCs that allow you to lock in fixed rates on various portions of your balance.)

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.

Home equity loans and HELOCs are only an option if you’re a homeowner with sufficient equity.

Personal loan

Personal loans or personal installment loans allow you to borrow a lump sum for credit card consolidation and pay it back at a (usually) fixed interest rate. Most personal loans are unsecured, so no collateral is required. Qualification is based on your credit standing and financial situation.

Secured personal loans are also available, but less common. For example, if you have a valuable asset like a Certificate of Deposit account or a collectible car, you could pledge your asset as a guarantee that you’ll repay the loan. You could improve your approval odds and potentially lower your rate by offering collateral because the collateral reduces the lender’s risk.

The amount you may be able to borrow depends on the lender's guidelines, your credit scores, and your income. Typical personal loan limits can range from $35,000 up to $100,000. You'll generally need a higher credit score for the best interest rate. Personal loans for bad credit exist too and often carry much higher interest rates.

Balance transfer

A balance transfer moves balances from one or more credit cards to a new card, typically at a 0% APR for a set period. For instance, you may qualify for a 0% introductory rate for 18 months. Once this introductory period ends, the regular variable APR will apply to any remaining balance.

You'll need good to excellent credit for the best offers, and this strategy works best if you can repay the balance in full before the promotional period ends. Find the intro APR, balance transfer fee, and time frame details below.

What If You’re Already Behind On Payments?

If consolidation isn't affordable or you're already behind on payments, debt settlement is a distinct approach to get credit card debt relief. 

Debt settlement means negotiating with your creditors to get them 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 or work with a professional debt settlement company like Freedom Debt Relief.

Debt settlement may negatively impact your credit.

Compare Your Credit Card Consolidation Options

In addition to credit card consolidation loans, there are other ways to get a better handle on credit card debt. For example, you might borrow from your retirement account, enroll in a debt management plan, or attempt debt settlement. Each method fits a different financial situation. Here they are at a glance.

Home Equity Loan for Credit Card Consolidation

In a nutshell: If you’re a homeowner with sufficient equity, borrow against it and use the money to pay off your credit cards. Rates are typically lower than other borrowing options. Requires fair credit or better. 

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 for credit card consolidation. Fixed interest rates keep your monthly payment predictable, which makes it easier to budget. And payments tend to be low since 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, so it may make the most sense for larger borrowing amounts.

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

For instance, 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 a total of $7,518 in interest charges. If 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 lower than your credit cards.

Costs: Loan fees, typically 2-5% of the loan amount, full debt repayment, and interest over your loan term.

Credit Card Consolidation With a HELOC

In a nutshell: Similar to a home equity loan, plus the flexibility to borrow, repay, and borrow more as often as you like (up to your credit limit) during the first few years.

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 at all by consolidating credit cards with a home equity line of credit.

Costs: Loan fees, typically 2-5% of the loan amount, full debt repayment, and interest over your loan term.

Personal Loan for Credit Card Consolidation

In a nutshell: Approval is based on your creditworthiness and financial situation. You don’t need to be a homeowner. Rates are typically lower than credit cards and higher than home equity loans. Available with a range of credit scores. Rate reflects credit score.

Personal loans work well for credit card consolidation if 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

Personal loan interest rates and 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 what term you choose.

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. A free personal loan rate quote gives you an idea of what your monthly payment might be. Compare that number to your monthly budget to find out what you could realistically afford.

Costs: Loan fees, typically 0-12% of the loan amount, full debt repayment, and interest over your loan term.

401(k) Loan for Credit Card Consolidation

In a nutshell: If your plan allows it, borrow against your own retirement and pay yourself back. Typically no credit check. Potential taxes and penalties, and lost opportunities for growth.

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 when you're ready to retire.

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, which could mean a big tax bill when it's time to file. 

Cost: Setup fee (typically $50-$300), possible administrative fee ($25-$50 per year), plus full debt repayment and interest over your loan term.

Consolidate Credit Cards With a Balance Transfer

In a nutshell: Move your balance from one credit card to another, for a fee, typically to get a temporary zero or low interest rate. Requires good to excellent credit.

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 across card issuers.

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 fee

• Regular 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 for you.

Costs: Balance transfer fee, typically 3%-6% of each transferred balance, plus full debt repayment. Any balance remaining when the intro period ends is subject to the card’s regular interest rate.

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 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 on one or more paid-off cards once you free up that credit by transferring the balances. 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, which is another credit scoring factor.

At the same time, you free yourself up to focus on dealing with the debt you already have. Paying off the new balance transfer card could have a positive impact on your credit standing, so the effect 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 helps you put yourself in a financial safety zone that lets you focus on your existing debt.

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

DIY Debt Consolidation

In a nutshell: Choose a debt payoff strategy and manage it yourself. No credit score requirement.

If you're up to the challenge, you could handle your debt payoff strategy on your own without a new loan. Debt payoff strategies are rarely fast or easy. Even so, each of these strategies has worked for other people and might work for you too.

• Debt snowball method: List your debts from smallest to largest. Make the minimum payment on every debt except the smallest one, and put as much as possible toward that smallest balance each month. Once it's paid off, move the entire payment to the next smallest debt. The snowball method clears your first debt quickly, which feels rewarding and could keep you motivated to continue.

• Debt avalanche method: Rank your debts by interest rate, highest to lowest. Make minimum payments on every debt except the one with the highest rate, and put the rest of your budget toward that balance first. 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, and it builds skills and confidence you'll keep using long after your balances are paid off.

Costs: Full debt repayment including interest until the balances are paid off.

Credit Counseling Services to Consolidate Payments

In a nutshell: Close your credit card accounts and pay them off under the supervision of a nonprofit credit counseling agency, with a single combined monthly payment. Lower interest rates typically available. No firm credit score cutoff.

Credit counseling is for people who need professional guidance to deal with their unsecured debt, credit scores, and money management. 

Here's what happens:

• The credit counselor evaluates your income, expenses, debts, and goals, to determine your eligibility for a debt management plan. 

• If you qualify and enroll, the counselor will negotiate with your unsecured creditors to reduce the interest rate you pay or waive certain fees. Credit counseling agencies are funded by credit card issuers. It’s common for creditors to agree to these kinds of concessions while you’re in a DMP.

• You’ll make monthly payments calculated 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 and remove any 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.

Costs: Setup fee (up to $79), monthly fee ($30 to $100), plus full debt repayment at negotiated interest rates. 

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 to compare loan offers

• Make sure a new 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

And in terms of the don'ts:

• 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 magic. 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 if you're able to fully repay your debts, you find a new loan or card with a lower rate than what you're paying now, and you want one predictable payment. 

If you can’t afford to fully pay off your debts, debt settlement may be a better fit. Get started to learn what a debt relief plan could offer for your situation.