Debt Consolidation

What’s The Best Way to Consolidate Credit Card Debt? Try These 7 Options

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If you are carrying debt on multiple credit cards, debt consolidation can simplify your payments and save money. Credit card debt consolidation is when you roll multiple card balances into one monthly payment, ideally at a lower interest rate. You could do this with a personal loan, a new credit card or by enrolling in a debt management plan, among other options.

Figuring out the best way to consolidate your debt will depend on factors such as how much you owe, your credit score, whether you own a home or hold investments, and how much you can afford to pay on a monthly basis. In this guide, we’ll discuss some of the most common ways to consolidate debt and how to decide if they’re right for you.

7 ways to consolidate credit card debt

To see what your best consolidation option might be, start by pinning down the type of financial assets you already have, or might be able to access. Then, check the list below for some ideas:

Take out a personal loan

A personal loan gives you a lump sum that needs to be repaid by the end of a fixed loan term. The appeal of using a personal loan to pay off credit card debt is that it gives you an installment schedule that has equal payments. Make every scheduled loan payment on time, and you’ll be debt-free by the end of the term.

Personal loans are usually unsecured, which means you don’t have to put up collateral like a car or house to back the loan — instead, your signature on the loan contract promising to repay the debt is enough to secure funds. A credit card consolidation loan may have an origination fee of up to 8%.

Personal loan terms can last anywhere from 12 to 144 months, depending on the lender. You can borrow as little as $1,000, or as much as $100,000 in some cases. The loan terms you qualify for will be closely determined by factors including your credit score, payment history, income and current level of debt. To qualify for a personal loan to pay off debt, you’ll usually need a minimum credit score of 600, though a score of 760 or above may give you access to the lowest interest rates.

Pros and cons of using a personal loan
Pros Cons
  • Flexible loan amounts and loan terms
  • Fixed interest rates
  • You may qualify with less-than-perfect credit
  • No collateral needed in most cases
  • You’ll need good to excellent credit to qualify for the lowest interest rates
  • Some loans have origination fees and/or prepayment penalty fees
  • As with other loans, a hard credit inquiry is required, which may affect your score temporarily

Tap your home equity

Home equity loans and home equity lines of credit (HELOCs) are financial products where your home serves as collateral, so the interest rates they offer can be much lower than rates for credit cards.

Lenders may let you borrow up to 85% of your home equity depending on your credit, your home’s value and your debt-to-income (DTI) ratio. But the stakes are higher — you risk losing your house if you can’t keep up with payments.

A home equity loan offers a lump sum payment, and the repayment period is typically over five to 15 years, with a fixed interest rate. In contrast, a home equity line of credit works like a credit card, by providing you with a credit limit you can draw from. HELOCs typically have a variable interest rate and a draw period of up to 10 years, followed by a repayment period (often 15 to 20 years) when you can no longer draw cash.

Pros and cons of a home equity loan or HELOC
Pros Cons
  • Interest rates are low compared to unsecured personal loans and credit cards
  • For a HEL, payment is fixed for life of loan
  • A HELOC is flexible and gives you credit on an as-needed basis
  • Home equity products have fees such as closing costs
  • You’ll need sufficient equity in your home to borrow money
  • You could lose your home if you default

Apply for a balance transfer credit card

A credit card balance transfer is a way to pay off high-interest credit debt by rolling it over to a new card with a lower interest rate, or even a promotional 0% APR that often lasts between 12 and 21 months.

To qualify for a promotional APR, you’d usually need to transfer the balance within a few months of opening the card. This type of deal may allow you to pay down your debt without interest charges — however, note that if you don’t pay off the balance by the end of the promotional offer, your remaining balance will be subject to the card’s standard balance transfer APR. Make sure to review your card’s terms and conditions.

Balance transfer cards often come with a one-time balance transfer fee of 3%, and you usually need a credit score of at least 700 to qualify for the best balance transfer cards with a 0% APR. Missing a payment can mean you get booted from the promotion too, so be sure to make payments on time.

Pros and cons of a balance transfer credit card
Pros Cons
  • May let you pay back debt with zero interest over a 12 to 21 month period
  • Some cards have no balance transfer fee
  • 0% APR deals require great credit score
  • You’ll likely pay a balance transfer fee
  • Hard credit inquiry is required to apply

Enroll in a debt management plan

Some credit counseling agencies offer debt management plans to help borrowers with a high amount of debt, whether from credit cards or other sources. If you’d like to consolidate your debt without hurting your credit, this might be an option. You won’t need to pass a credit check to qualify for a debt management plan because you’re not going for a product like a personal loan either. Instead, a credit agency acts as a middleman: You make one payment to the agency, and it pays your creditors (as well as handling communication with them) until the debt is paid off.

With a debt management plan, a counselor reviews your finances and calls creditors to negotiate lower interest rates and fees. Debt management plans usually last four to five years, and the monthly service can range from $25 to $35.

Pros and cons of a debt management plan
Pros Cons
  • No credit check
  • A counselor can negotiate lower interest rates and waived fees on your behalf
  • You won’t have to deal with creditors directly
  • Limited credit card use
  • Some agencies charge an upfront fee for the first counseling session
  • May need to pay a monthly fee

Borrow from your 401(k)

You may be tempted to dip into a 401(k) retirement account for consolidating debt if you’re sitting on a nice sum. But if your plan allows it, borrowing money might be a better option than withdrawing it outright: 401(k) loans are not taxed as income, as long as you follow the rules and pay back the money.

In general, you can borrow up to 50% of the vested account balance in a 401(k) plan, for a maximum of $50,000, as long as you pay the loan back within five years and make payments, including both principal and interest, at least every quarter (some plans may have a different payment schedule). For those with a vested balance of less than $10,000, you can borrow against the full amount, up to $10,000. Interest rates and fees vary, but may include a setup fee and a quarterly maintenance fee.

However, borrowing 401(k) money may not be the best option for everyone. For one, you’ll miss out earnings while the money you’ve borrowed is out of your 401(k). This can amount to thousands in lost savings. Further, the loan might become due if you are fired or resign from your job, or if the plan is terminated. In these cases, the balance you owe might be subject to income tax and possibly also a 10% early distribution tax if you fail to make loan payments at least once a quarter.

Pros and cons of a 401(k) loan
Pros Cons
  • No credit check involved, as you’re borrowing from yourself
  • No tax penalty as long as you follow the rules
  • The repayment term is up to 5 years
  • If you have more than $10,000, you can only borrow the lesser of a) 50% of your vested account balance or b) $50,000
    • For less than $10,000, the maximum is $10,000
  • Tax penalties if you can’t pay the balance off
  • No compounded retirement savings growth while money is out of the account
  • Not all plan providers permit 401(k) loans

Refinance your auto loan

With a cash-out auto refinancing, you refinance an auto loan for a higher amount than your existing loan balance, then take the difference in cash.

Let’s say your car is worth $20,000 and your loan balance is $12,000, and that the lender will let you borrow up to 75% of the car’s value. With this type of refinancing, you might be able to borrow up to $15,000, pay off your old loan ($12,000) and then have $3,000 left to pay off credit card debt. Since this loan is secured by collateral (your car), the interest rate might be lower than what you’re now paying on your credit cards.

If you can’t make payments, though, the lender can seize your car. You also need to have enough equity in your car to meet lender requirements. Some lenders may let you borrow more than your car is worth, but this could turn into a major financial problem if your car were stolen or damaged, or you had to sell it and your loan were to go “underwater.” This could make it even harder to pay off or refinance your existing loan.

Pros and cons of a cash-out auto refinance
Pros Cons
  • Depending on your credit, you may qualify for a low-interest rate because your car is the collateral
  • You can refinance your auto loan and credit card debt all in one go
  • You may be able to borrow up to 100% or more of the car’s value
  • You risk going underwater if your loan balance ends up being more than what your car is worth
  • Lenders may limit model years eligible for refinancing
  • The lender can take your car if you default

Ask family or friends for a loan

Borrowing money from family or friends to help consolidate debt is an option if you know someone with the means to offer you a loan. Before borrowing, you and your lender need to decide on terms — like whether you’ll pay interest — and all terms should be in writing. Disputes over money can damage relationships, so be prepared to take repayment as seriously as you would if you had borrowed from an actual lender.

Pros and cons of borrowing from friends and family
Pros Cons
  • No credit check involved
  • No origination and/or prepayment penalty fees
  • You and the person lending the money have flexibility to create your own loan terms
  • You may not have access to a friend or family member who has enough money to loan
  • Asking someone to lend you money can cause major relationship rifts

FAQ: Credit card debt

What are some alternatives to consolidating credit card debt?

Instead of using a debt consolidation loan to pay off credit cards, you may also want to consider trying classic debt repayment strategies like the debt snowball or debt avalanche methods.

With a debt snowball, you make the minimum payments on all of your debts except the one with the lowest balance. Once that one is repaid, you focus on paying off the debt with the next-lowest balance. With a debt avalanche, you make the minimum payment on all your debts except the one with the highest interest rate. While a debt snowball can keep you motivated with small wins, a debt avalanche will save you more money over interest charges.

Can I consolidate credit card debt on my own?

Yes. You don’t have to work with a credit counseling agency, or any other intermediary. Personal loans, home equity loans and home equity lines of credit are all products you can apply for on your own. You can also refinance credit card debt by opening a balance transfer card that’s offering a low-interest balance transfer promotion.

Can I consolidate credit card debt without hurting my credit?

Consolidating your debt with a credit card debt consolidation loan can cause a small credit score drop, since lenders typically do a hard credit inquiry to approve your application. The drop is usually temporary, and you may actually see a notable score increase as you pay the debt off.

What is debt settlement?

Don’t confuse debt consolidation with debt settlement — the latter can do severe damage to your credit.

Typically with debt settlement, you’ll work with a debt settlement company that will tell you to stop making debt payments. During this time, the debt settlement company will attempt to negotiate a payoff amount with each of your creditors.

The problem, however, is that creditors may be unwilling to settle, and your credit will take a major hit due to missed payments and loan default.


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