Credit Card Consolidation

If you have significant high-interest credit card debt, you might feel in over your head. Your balances keep growing, and you feel like you’ll never become debt free. Luckily, there is one way to make paying off credit card debt easier: credit card consolidation. 

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What is credit card consolidation?

Credit card consolidation involves combining all of your credit card debt and paying it off in one monthly payment. There are numerous ways you can pay off your consolidated credit card debt, from personal loans to balance transfer credit cards. But one thing remains the same regardless of the method you choose: instead of making multiple monthly payments, you will just make one.

Consolidating credit card debt can come with numerous benefits. In addition to only making one monthly payment, you will likely secure a lower interest rate than you have with your credit card company. You might also be able to secure a lower monthly payment and be able to pay your debt back over a longer period of time. Plus, you can potentially improve your credit score in the process of repaying your debt.

Worth noting, however, is that experts don’t recommend consolidating credit card debt if your total amount of debt is more than 50 percent of your annual income. If you’re unsure whether consolidation is the right decision for you, you can always contact a nonprofit credit counselor for advice.

There are various ways you can consolidate credit card debt. Regardless of the method you choose, consolidating your debt can put you on the path to successfully becoming debt free.

Credit card consolidation options

There are numerous ways to consolidate your credit card debt. Below, we’ve explored some of the most common methods.

One popular way many people consolidate their credit card debt is by transferring their balances to a single balance transfer credit card with a low introductory interest rate. Sometimes, these cards will have introductory rate grace periods as low as 0% APR. If you can pay off your balance within the introductory rate time frame — typically six months to a year, though it can go as high as 21 months — you’ll save significantly on interest.

  • Benefits

    If you’re diligent enough to pay back your credit card debt within the introductory rate grace period, you’ll be able to get out of debt at a significantly lower interest rate.

  • Risks

    If you don’t pay your balance within the introductory rate grace period, you risk being hit with an even higher interest rate once the grace period ends.

    Some balance transfer credit cards also have balance transfer fees that are so high they might counteract your potential savings on interest. Make sure you do the math to determine whether the potential savings on interest outweighs the fees.

  • Best for

    People with good credit scores. Typically, you will need a good credit score (at least 700) to qualify for a balance transfer credit card.

    In addition, this method for consolidating and paying off debt is ideal for people whose total debt isn’t too high — say $3,000 or $4,000. Your total debt should be an amount that you can realistically pay back within the introductory rate time frame.

You’re probably familiar with personal loans — they’re used for everything from large purchases to home repairs. Many people also take out personal loans, sometimes referred to as debt consolidation loans, to pay off high-interest credit card debt.

Debt consolidation loans can be anywhere from $250 to $100,000, and using them for credit card debt consolidation comes with its pros and cons. For one, you’ll likely be able to secure an interest rate that is lower than that of your credit cards. In addition, you’ll be able to make just one monthly payment, which can streamline your finances. However, not paying back your personal loan means you’re at risk for getting yourself into even more debt.

  • Benefits

    Personal loans typically have fixed interest rates, which means you know exactly how much you’ll be paying in interest from the get-go. (Credit cards can have variable interest rates.) Plus, personal loan interest rates are often lower than credit card interest rates.

  • Risks

    If you don’t have good financial habits in place, taking out a substantial personal loan can be dangerous. You have to be committed to using the personal loan solely for your credit card debt, not personal or “fun” purchases.

  • Best for

    Debt consolidation loans are ideal for people with a significant amount of debt, as the term for repaying the debt can be as long as 60 months.

    They’re also ideal for people with average credit. You can likely secure a personal loan with a credit score of just 580, though if your credit score is too low, you may not be able to land a good interest rate.

    If you’d like to explore your personal loan options, use this LendingTree tool. It may match you with personal loan offers you can compare and consider.

You’ve likely heard of home equity loans (HELs) and home equity lines of credit (HELOCs). They’re often used for home repairs, home improvement projects and to cover expenses during times of crisis, such as illness or loss of a job.

HELs are also used to pay off high-interest credit card debt. If you hold significant equity in your home and are certain you can diligently pay off your credit card debt, this could be a good path for you.

But because of the risks associated with taking this route to pay off credit card debt, you must do your due diligence to be certain it’s your best option. After all, if you don’t repay your HEL, you could lose your home. This is a riskier debt consolidation method than personal loans or balance transfer credit cards, and therefore it should not be taken lightly.

  • Benefits

    You can borrow against yourself and you might be able to secure a lower interest rate than you would with a personal loan or balance transfer credit card.

  • Risks

    By taking out a HEL to pay off credit card debt, you’re trading unsecured debt for secured debt. If you don’t pay off your credit card debt, you risk being contacted by debt collectors and potentially sued. But if you don’t pay off your home equity loan, you risk literally losing the roof over your head.

    In addition, HELs often come with fees that could negate the potential savings on interest.

  • Best for

    People with significant equity in their home and the ability to diligently repay their debt.

Alternative options for credit card consolidation

Although the above methods are the most common ways people consolidate and pay off their credit card debt, there are other options. Below are a handful of additional ways you can get creative to pay off your high-interest credit card debt.

401(k) loan

Borrowing against your retirement savings is one way to pay off credit card debt.

It can be tempting to borrow against your 401(k) or take out funds you already contributed to your individual retirement account (IRA). But you should be wary of doing this. After all, you’re eating into your future retirement savings. Plus, if you lose your job, you risk being in an even worse position than you were to begin with. You’ll be forced to repay the 401(k) loan and if you cannot, you will have to pay taxes on the loan.

However, there are a handful of benefits to borrowing against your 401(k), assuming you are confident you will be able to repay the loan. You are borrowing against yourself, and therefore it will be fairly quick and easy to access the loan. Plus, your credit score will not be checked, and the loan will not show up at all on your credit report.

Friends and Family

If you’re in truly dire financial circumstances, you can consider borrowing money from a family member or friend. According to a 2017 survey from LendingTree, nearly three in four Americans have borrowed money from a family member at some point.

This, of course, comes with many risks, the primary one being that you could jeopardize your relationship with this person if you don’t repay your loan. In fact, the same study referenced above found that over 25% of people who borrowed money from a family member experienced negative emotions because of it.

If you pursue this route, you should be absolutely certain you can repay the loan or else your relationship with this person could become strained.

Nonprofit credit counseling

If you’re unsure which debt consolidation strategy is right for you, consider speaking with a nonprofit credit counselor. Not only can they help you figure out which debt consolidation method is best for you, they can also help you get a plan in place for repaying your debt to make things easier. You will simply pay the credit counseling agency each month, and they will disperse your money to your various accounts.

Another benefit of contacting a credit counseling agency is that they can educate you on healthy financial habits. It’s a win-win: You will get out of debt while learning everything you need to in order to avoid making the same mistakes again.

To avoid potential scams, make sure you’re contacting a certified counseling agency, not a debt relief firm.

Learn more about credit counseling agencies here.

Should you consolidate credit card debt?

Consolidating your credit card debt can allow you to finally become debt free.

By consolidating your debt, you can reap numerous benefits. Only making one monthly payment can bring peace of mind and lower the stress associated with your credit card debt. Plus, consolidating credit card debt can lead to a potentially lower interest rate and lower monthly payment. And in the process of repaying your debt, you might even increase your credit score.