5 Strategies to Consolidate Credit Card Debt
If you have high-interest credit card debt, consolidating your balances into a single monthly payment can make it easier to manage and may even save you money in the long run. There are many ways to consolidate credit card debt, but the strategy that works best for you will depend on your financial position.
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What is credit card debt consolidation?
Credit card debt consolidation involves combining multiple credit card balances into one monthly payment.
Consolidating credit card debt may help you save money long term, can make it easier to keep track of your payments and may even help you pay off your debt more quickly.
This strategy is best for those who can qualify for a lower interest rate than what they’re currently paying. To qualify for a lower interest rate, you’ll want to make sure your credit is in good shape, as this is what potential lenders examine to determine your creditworthiness.
Credit card refinancing vs. credit card debt consolidation
Credit card refinancing means renegotiating the terms of your current debts by qualifying for a lower interest rate or monthly payment. Transferring your balances to a 0% intro annual percentage rate (APR) credit card is a common form of credit card refinancing.
Credit card debt consolidation, on the other hand, means taking out a personal loan to pay off multiple credit card balances. This option can consolidate multiple monthly payments to just one payment you’ll need to keep track of, and ideally, your consolidation loan will come with a lower interest rate.
| Pros | Cons | |
|---|---|---|
| Credit card refinancing | May save on interest if you qualify for 0% intro APR Can use credit card to pay for other expenses May pay off your credit cards more quickly since if you’re not paying interest | May have to pay a balance transfer fee Balance transfer process may take as long as six weeks Variable interest rate means your payments may fluctuate with market conditions |
| Credit card debt consolidation | Will receive funds via a lump sum Some lenders will repay credit card companies directly Set repayment duration will give you a clear end date | May have to pay an origination fee Low rates require a strong credit profile Interest rates are fixed so you won’t see your payments go down if the market is good |
How does credit card debt consolidation work?
To consolidate your credit card debt into one loan, shop around for a personal loan lender with rates and terms that work for you. With many lenders, you can prequalify for a loan without any impact to your credit score.
If you prequalify, your lender will require you to verify the information you provided and then run a hard credit pull on your credit background.
After your lender officially approves your loan application and you accept your loan, it can take one to five business days to receive your funds; some lenders may take longer, while others offer same-day funding. Some lenders will even directly pay off your credit card companies.
How to consolidate credit card debt on your own
If you’re struggling to manage your credit card debt, you don’t have to hire a debt relief company, which can cost you even more money in the long run. Instead, consider these methods:
- Apply for a balance transfer credit card
- Take out a debt consolidation personal loan
- Get a home equity loan or personal line of credit
- Tap into your 401(k) savings
- Consider these repayment strategies
1. Apply for a balance transfer credit card
A balance transfer credit card is a product that allows you to move debt from one card to another. Many credit card companies have introductory period offers to attract new customers, which typically come with a low or 0% APR period that can last anywhere from six to 21 months.
During this time, you’ll want to aggressively pay off the balance of that credit card. Once the promotional period ends, you’ll start accruing interest on any remaining balance.
You’ll generally have to pay a balance transfer fee — typically 3% to 5% of the total balance — to move your debt in the first place.
Balance transfers often take three to seven days to process, but in some cases you may have to wait up to six weeks. Take that timeline into account when comparing your options.
| Pros | Cons |
|---|---|
Can save money on interest if you qualify for a 0% intro APR credit card Can use your credit card to make other purchases, if necessary Depending on the credit card, you can have as long as 21 months to pay off your credit card balance with no interest | May have to pay a balance transfer fee Can take up to six weeks before your funds are transferred After the 0% intro APR promotional period ends, you’ll be charged interest on any remaining balance |
2. Take out a debt consolidation personal loan
A debt consolidation loan is the most common type of personal loan. These loans come with fixed interest rates and minimum monthly payments. You can calculate how much you may owe each month using a loan calculator.
Unlike a credit card, it also comes with a set repayment term — typically up to 60 months or longer — so you’ll know when your debt should be fully paid off.
Credit card consolidation loans are unsecured, so you won’t need to put down any collateral. However, this means lenders will heavily weigh your credit score and history when they consider you for a loan — so you’ll want to make sure your credit is in a good place before you apply.
These loans are disbursed in a lump sum and some lenders will even send your funds directly to your original creditors.
Keep in mind that some personal loan lenders charge origination fees — a one-time administration fee — which can range from 1% to 10% of your total loan balance.
| Pros | Cons |
|---|---|
Are typically unsecured, so you won’t have to sacrifice collateral if you’re unable to repay the loan Because it comes with a set repayment term, you’ll know when to expect your loan to be paid off Interest rates are fixed, so you’ll know what your minimum payment will be each month | May come with an origination fee that’s taken out of your loan balance Comes in the form of a lump sum, so if you need more money, you may have to take out another loan or use a credit card If you don’t have good credit, you may not qualify for a loan with low interest rates |
3. Get a home equity loan or personal line of credit
A home equity loan or home equity line of credit (HELOC) — also called second mortgages — are options for homeowners who want to tap into the equity they’ve built up to pay off their credit card bills.
Similar to debt consolidation loans, home equity loans come in lump sums and have fixed interest rates. Typically, you can borrow up to 85% of your home’s value.
HELOCs are more similar to credit cards. Their rates will fluctuate over time and, instead of receiving a lump sum of cash, you’ll have access to a revolving credit line. HELOCs come with draw periods (during which you can borrow money) and repayment periods (when you’ll need to pay it back).
However, homeowners should be cautious, since this type of credit uses your home as collateral — and if you’re unable to repay your debt, you could lose the roof over your head.
| Pros | Cons |
|---|---|
May qualify for lower rates, since these forms of credit are secured by your home Can borrow a large sum of money Interest may be tax deductible | Your home is at risk of foreclosure if you're unable to repay the loan Typically requires a home appraisal Limited in how much equity you can borrow |
4. Tap into your 401(k) savings
With a 401(k) loan, you borrow from your personal retirement account rather than from a traditional lender.
This type of loan typically allows you to borrow up to $50,000 or 50% of your savings within a 12-month period. Generally, you’ll have about five years to repay the loan, plus interest.
If you have bad credit, a 401(k) loan may be a good option for you, as there are no credit checks involved. Your credit score also won’t take a hit if you miss payments, since these loans aren’t usually reported to the credit bureaus.
| Pros | Cons |
|---|---|
Doesn’t require a credit inquiry Won’t have to pay taxes on penalties, as opposed to a 401(k) withdrawal Interest you pay goes back to your 401(k) account | You only have five years (60 months) to repay the loan Can only borrow up to $50,000 or 50% of your 401(k) savings If you default on the loan, you’ll owe taxes and have to pay a 10% penalty |
5. Consider these repayment strategies
If you’re struggling to keep up with your credit card payments and you have bad credit, your debt consolidation options may be limited. In these situations, you may have to turn to more aggressive repayment strategies.
Credit counseling
Credit counseling is a low-cost option for those who are overwhelmed by credit card debt. This service is typically offered by nonprofit agencies.
A credit counselor can sign you up for a debt management plan that can take three to five years to complete. They may also be able to get your fees waived or reduce your minimum monthly payments.
Not only can a credit counselor help you come up with a debt management plan, they can also help you learn budgeting skills so you can afford your payments and hopefully avoid future financial pitfalls.
To avoid credit repair scams, look for credit counseling agencies through the Department of Justice’s approved list of credit counseling agencies.
| Pros | Cons |
|---|---|
Credit counselor can help you with budgeting tools Your credit counselor may be able to get fees waived or lower your interest rates Credit counselors work with your creditors so you don’t have to | You won’t be able to use your credit cards during this time May have to pay credit counseling organization a monthly fee May come across credit counseling scams |
Debt avalanche method
The debt avalanche method is a debt repayment strategy that involves paying off your debts in order of the highest interest rates.
For instance, if you have three credit cards, you’ll aggressively pay off the balance of the card with the highest interest rate first. Once that card is paid off, you’ll begin intense repayment on the credit card with the second-highest interest rate, and so on.
Since you’re focused on paying off debts with high interest rates first, you may end up saving yourself money in the long run.
| Pros | Cons |
|---|---|
You may pay your debts off sooner than if you were to prioritize paying off the highest balances first May save yourself money over the lifetime of the debt | Payoff can take longer than debt snowball method, since accounts with the highest interest rates may have the highest balances Requires that you have room in your budget to pay extra payments each month |
Debt snowball method
The debt snowball method is the process of paying off your debts in order of smallest to largest balances.
For example, if you have three credit cards, you’ll start by paying off the credit card with the smallest balance left on the card, rather than the highest interest rate. You’ll still pay the minimum monthly payments on your other credit cards, but any extra cash you have on hand will go toward the card with the smallest balance. When that card is repaid, you’ll move to the card with the next smallest balance.
This strategy can come with a faster emotional payoff than the debt avalanche method since you’ll pay off your balances more quickly, especially in the beginning. However, you may end up paying more over the lifetime of the loan in interest.
| Pros | Cons |
|---|---|
Quick wins can help keep you motivated to continue Reduce the number of balances you have at a faster rate | May end up spending more money in the long run on interest Will need to have flexibility in your budget to make extra payments |
Frequently asked questions
Closing a credit card can increase your credit utilization ratio, which can lead to a credit score decrease. If you have rewards or cash-back cards that you can repay in full each month, it may be worth keeping those accounts open.
However, if you don’t think you’d otherwise be unable to avoid charging new purchases, closing your credit cards might be the right move.
Yes — taking out a credit card debt consolidation loan can both negatively and positively impact your credit score.
When you apply for a loan, your lender will run a hard credit inquiry, which can cause your credit score to drop by a few points. On the other hand, as you continue to make on-time payments on your loan, your credit score will go up if your lender reports payments to the credit bureaus.
Whether it’s smart to consolidate your debt will depend on your financial situation and the amount of credit card debt you have.
If you have a good credit score and can afford to make the minimum monthly payments, debt consolidation may help save you money in the long run. However, if you have a low credit score and you’re struggling to make payments, options like credit counseling may be a better fit.