Ways to Consolidate Credit Card Debt

What is credit card consolidation?

Credit card consolidation combines multiple credit card balances into one lump sum through a new line of credit. This allows you to have one monthly payment and one annual percentage rate (APR) to worry about.

You can also save money by consolidating your credit card debt to a lower APR. This strategy can help you pay off your balances faster.

Consolidating credit card debt can improve your credit score by lowering your credit utilization rate (with a debt consolidation loan) and through on-time monthly payments.

» MORE: Personal loan vs. credit card: Which is better?

Pros and cons of debt consolidation

Debt consolidation can make your monthly bills more manageable. However, as with any financial strategy, there are pros and cons to consider before applying.

Pros of debt consolidation

• One monthly payment: Credit card consolidation combines all individual credit card payments into a single payment.
• Lower interest rate: Using a personal loan or low-interest-rate card to consolidate debt can save you money as you repay your balances.
• Improved credit score: Payment history accounts for 35% of your FICO credit score. Credit utilization accounts for 30%. Making on-time payments and lowering your debt load (with a debt consolidation loan) can boost your score in a short amount of time.

Cons of debt consolidation

• Additional fees: Some lenders charge origination or balance transfer fees, depending on how you consolidate debt.
• Higher overall cost: While your new line of credit might save you money on your monthly debt payments, it can cost more in the long run, especially if you have a repayment term longer than five years. This is because you are taking your debt balance and stretching out your repayment term. For example, a $10,000 loan with an 8% interest rate will cost $1,1718.20 total in interest over four years. Take seven years to pay off the same loan, and you will owe an extra $1,374.22 in interest.
• Not a cure-all: Debt consolidation has helped many people achieve financial freedom, but it’s not a magic wand. You still need to focus on budgeting and setting up an emergency fund to avoid more debt in the future.

Options for consolidating credit card debt

There are several options for consolidating credit card debt. The best choice for you is the one that will help you manage your debt without weighing you down with costly fees and interest. 

• Personal loan: You can use a personal loan to pay off your credit card balances, allowing you to have just one fixed monthly payment. You’ll need proof of income and good credit to qualify for a lower interest rate.

• Credit card balance transfer: Barry Rafferty, senior vice president at the personal finance company Achieve, said a balance transfer might be preferable to a personal loan. However, he said, “Balance transfer credit cards, which carry a low or zero interest rate, are usually available only to those with good credit.” He added that paying off the debt before the promotional interest rate expires will help you avoid high fees.

• HELOC or home equity loan: These options allow homeowners to borrow against the equity they’ve built in their homes. A home equity line of credit (HELOC) works like a credit card, with a line of credit that’s available for a set amount of time. You can also choose a home equity loan, which provides a lump sum of money you pay back in monthly installments. Note that both options are secured by your property, so you risk losing your home if you don’t stay on top of repayments.

• Debt management program: A debt management program might be the best option if your debt is too much to manage on your own or you’re facing a hardship, like job loss or divorce. Debt management programs help you repay your debts at a lower interest rate while counseling you through the process. These programs are offered by credit counseling agencies, which also offer financial education resources.

How to consolidate credit card debt step by step

After you select a debt consolidation method, follow these steps to compare options, avoid unnecessary costs, and stay on track toward paying off your debt.

1. Tally your debts. List each credit card's outstanding balance, interest rate, minimum payment and due date. Knowing your total debt and monthly payments will make comparing easier.

2. Check your budget and credit. Review your credit score, income and monthly expenses so you know what you can realistically afford to repay each month. Check your credit reports for errors before applying for new credit.

3. Prequalify where possible. If you're considering a personal loan or balance transfer credit card, look for lenders offering prequalification with a soft credit inquiry. This way you can estimate your eligibility and potential rates without affecting your credit score.

4. Compare offers and total repayment cost. Look beyond the advertised interest rate and monthly payment. Check APRs, balance transfer or origination fees, repayment terms and the total repayment cost to determine the overall repayment cost.

5. Apply. Submit your application and any required documentation. If you're approved, review the final terms carefully before accepting.

6. Pay off or transfer your existing balances. Follow instructions to collect your funds or transfer your balance. Continue making at least the minimum payments on your existing cards until you confirm the balances have been transferred.

7. Set up autopay. Schedule automatic payments for at least the required amount each month. For a balance transfer, calculate how much you need to pay each month to clear the balance before the promotional period ends.

8. Monitor your accounts and avoid new debt. Confirm that the original balances are paid off, watch for residual interest or fees and keep an eye on your new account.

How to choose the right credit card debt consolidation method

The best way to consolidate credit card debt depends on your credit score, how much you owe and your total assets.

When comparing options, consider the total cost, including the APR, transfer fees and origination fees. Look beyond the monthly payment; a longer repayment term may lower what you owe each month but increase the total interest you pay.

These guidelines can help you narrow your options:

• If you have good credit and can repay your debt quickly: A balance transfer credit card with a 0% introductory APR could help you avoid interest temporarily as long as you pay it off before the promotional period expires.

• If you have good to fair credit and want a fixed repayment schedule: A personal loan may offer a lower APR than your existing credit card rates. It could reduce your total interest and simplify your payments.

• If you own a home and have sufficient equity: A home equity loan may offer a lower interest rate than unsecured debt consolidation options. However, your home serves as collateral, so you risk foreclosure if you fall behind on payments.

• If your credit score is low: If you don't qualify for credit cards or a loan, then a debt management plan through a nonprofit credit counseling agency may help you negotiate reduced interest rates and simplify your payments.

What qualifications do you need to consolidate credit card debt?

There are no universal eligibility requirements for debt consolidation. Each lender sets its own criteria, and a strong application doesn't guarantee approval.

Before you apply, review your credit score, income and debt-to-income (DTI) ratio, which measures how much of your monthly income goes toward debt payments. These factors determine your approval odds as well as the interest rate or terms you're offered.

Requirements will vary by lender, but here are some general eligibility guidelines:

• Personal loans: Some lenders may accept credit scores starting at 600 and a DTI of 50%. Higher scores and lower DTI will improve your chances of approval and help you qualify for a lower interest rate.

• Balance transfer credit cards: To qualify for a card with a lengthy introductory 0% APR, you likely need a credit score of 670 or higher, as well as a DTI that's no higher than 50%.

• Home equity loans: Lenders require you to have at least 15% to 20% equity in your home, as well as a credit score of 670 or higher. Your DTI should be no higher than 50%; however, 43% or lower will improve your odds of approval.

• Debt management plans: A nonprofit credit counseling agency typically reviews your income and DTI, rather than your credit score, to determine your ability to repay your loan.

» MORE: What is credit counseling?

Other ways to consolidate credit card debt

You could also consider these alternative methods to consolidate credit card debt, especially if you don’t qualify for a personal loan or low-interest credit card. These options come with heavier risks, so make sure you know all the costs before choosing one.

• Retirement account loan: You can borrow up to 50% of your vested account balance or $50,000 (whichever is less) from your retirement plan. Borrowing from your retirement savings might have lower interest than a personal loan, but you’ll be delaying your retirement savings and could face tax consequences.
• Borrowing from friends or family: A loan from a friend or family member can be convenient and less expensive than a loan from a traditional lender, but mixing finances and loved ones can be risky. If you have issues repaying, it could cause conflict in a relationship.
• P2P or crowdfunding: Peer-to-peer (P2P) lending and crowdfunding websites connect people seeking loans with those willing to provide the funds. P2P and crowdfunding loans can sometimes have higher fees or rates than loans from a bank, credit union or online lender.

FAQ

Bottom line

If your debt is beginning to feel overwhelming, it may be time to consider debt consolidation. Different consolidation strategies are better for different situations, so do your research to determine which works best for you. Before diving into a particular debt consolidation method, weigh the pros and cons to ensure you make the right decision for your financial situation.