How to Consolidate Credit Card Debt Without Hurting Your Credit

Comparison: 6 best ways to consolidate credit card debt

Compare our options for the best ways to consolidate credit card debt with minimal impact to your credit score.

6 ways to consolidate credit card debt with minimal credit impact

There are several ways you can consolidate credit card debt with minimal impact to your credit score. Balance transfer credit cards and debt consolidation loans are generally the best options for consolidating credit card debt, though other options include home equity loans or lines of credit, debt management plans and 401(k) loans.

1. Balance transfer credit cards

Balance transfer credit cards allow you to transfer multiple credit card balances to a new credit card with a 0% introductory annual percentage rate (APR) offer. These 0% intro APR offers typically last up to 21 months, allowing you to pay down debt without paying interest for the duration of the intro offer period.

However, after the intro APR period ends, the APR will revert to the standard APR. Balance transfer cards also typically charge balance transfer fees, which are usually 3% to 5% of the transferred balance. You’ll also typically need a good credit score or better to qualify for the best balance transfer credit cards.

Compare prequalified offers

Many lenders and credit card issuers allow you to check rates and terms by getting prequalified. This will trigger a soft credit inquiry, which won’t impact your credit score.

2. Debt consolidation loans

Debt consolidation loans are a type of personal loan that you can use to consolidate credit card debt or other types of debt. They work similarly to a balance transfer credit card, allowing you to combine multiple debts into one loan.

Debt consolidation loans are often unsecured loans that don’t require collateral, and you’ll usually get up to seven years to repay your debts. The best interest rates are reserved for people with good to excellent credit, but you still may be able to get a lower rate than what you’re currently paying on your unconsolidated debts.

3. Home equity loans or lines of credit

A home equity loan or home equity line of credit (HELOC) can be worth considering if you’re having trouble qualifying for a balance transfer card or debt consolidation loan. These loans typically have lower rates, larger borrowing amounts and longer repayment terms.

You’ll need to have enough equity in your home to support the loan, which is typically 15% to 20% of your home’s value. Also, since your home will serve as collateral for the loan, it can be seized by your creditor if you don’t repay your loan.

4. Debt management plans

A debt management plan (DMP) is a repayment plan available through a nonprofit credit counseling agency that typically lasts between three to five years. A credit counselor will work with your creditors to negotiate a payment plan that will make repayment more manageable. They might be able to negotiate a lower balance, waived fees and even a reduced interest rate in some cases.

However, debt management plans are not available for all debts. They are typically limited to unsecured accounts, such as credit cards, and there are also typically fees for this service. DMPs also will have a higher negative impact on your credit than other options since you’ll be required to close your credit card accounts. It may take years to see a positive impact on your credit score.

5. 401(k) loans

A 401(k) loan may be a good debt consolidation option for you if you have a significant balance in your account. When you borrow against the balance of your employer-sponsored retirement account, there is no hard credit inquiry, and payments are not reported to credit bureaus.

A 401(k) loan won’t impact your credit score when you take out a loan or if you miss payments.

However, taking out a 401(k) loan is risky. If your employment ends, you may have to repay the full balance of your loan immediately. If you are unable to repay the loan, it can be reclassified as a withdrawal, triggering additional taxes and fees. A 401(k) loan also takes your savings out of circulation, so you won’t earn any interest on those funds until they’re paid back. Plus, you’ll reduce your retirement savings and miss out on potential growth.

6. Family or friend loans

If you have family members or other personal connections with the resources to lend you money, a private loan from an individual is another way to consolidate credit card debt without impacting your credit score. This type of loan won’t be reported to credit bureaus unless there’s a formal structure to the loan, such as a co-signing agreement.

Depending on the terms you set with your family member or friend, you might get a low interest rate, or even no interest at all. However, this type of loan can be high risk as it may damage your relationship.

How consolidating credit card debt affects your credit score

Knowing how consolidating credit card debt will affect your credit score will help you minimize its impact to your score. Here are the main ways debt consolidation will affect your credit:

• Credit inquiry: If you take out a new loan, line of credit or credit card, your lender will run a hard credit inquiry to examine your credit history, which will temporarily lower your credit score.
• New credit: Opening a new account, such as a loan or credit card, will temporarily lower your credit score since it will reduce the average age of your accounts.
• Credit utilization ratio: Your credit utilization ratio, or how much of your available credit you’re using compared to your total credit limit, also impacts your credit score. As you pay off debt, your credit utilization will improve, which will improve your score.
• Credit mix: Your credit mix accounts for 10% of your FICO score and assesses the different types of debt you manage. Credit scoring models like to see a mix of credit, such as credit cards and installment loans.

How to minimize credit impact when consolidating credit card debt

There are ways you can minimize the impact to your credit score when consolidating credit card debt.

Automate your payments

Set up automatic payments to ensure you never miss a due date. Payment history is the most significant factor in your credit score, so consistent on-time payments are critical.

Don’t close old credit cards

Keeping older credit card accounts open helps preserve your length of credit history and total available credit, both of which influence your credit score. Even if you pay off a card, consider keeping it open with minimal activity.

Don’t open any more new credit

Don’t open any new credit cards or loans other than the balance transfer card or loan you open to consolidate debt. Opening more accounts will result in more hard credit inquiries, and it can slow your progress and offset gains to your credit score.

Check your credit reports for errors

Review your credit reports from all three major credit bureaus to ensure there are no errors affecting your score.

Pros and cons of consolidating credit card debt

Compare the pros and cons of consolidating credit card debt before opening a new account:

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