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, for example, 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. 

1. 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.
2. 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.
3. 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.
4. 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.

» 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.

1. 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.
2. 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.
3. 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.

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.