5 smart ways to consolidate credit card debt – and 5 you should never do

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Consolidating high-interest credit card debt with a lower-interest credit product could help you wipe out the debt faster and pay less interest. (iStock)

In theory, consolidating credit card debt sounds like a good idea. Replacing high-interest credit card debt with a credit product that has a lower interest rate could help reduce the amount of interest you ultimately pay on the debt.

There are a number of ways to consolidate credit card debt — all of them with their pluses and minuses. Some choices are better than others. But the goal of all of them is basically the same: to combine your high-interest debt, leaving you with one monthly payment at a more reasonable rate. 

If you’re considering consolidating your debt, it’s important that you find the option that works best for you and offers you the lowest-cost way to get out of debt.

What does 'credit card debt consolidation' mean?

If you have several credit cards with high interest rates and large balances, you may consider consolidating your debt. This means taking out a new credit product, such as a personal loan, to pay off your existing credit card balances and leave you with a single monthly payment. 

You might choose to do this for a number of reasons. For example:

  • Consolidating your credit cards into a new loan could get you a lower interest rate, and possibly reduce your monthly payment amount.
  • You might also be able to pay off your debt more quickly compared to making a minimum payment on each card.
  • A single payment is also simpler to keep track of than multiple credit cards, each with its own minimum payment and due date.

How does consolidating credit card debt work?

Because consolidating your credit card debt means taking out a new credit product, you’ll need to apply for one. Here's how it works:

  1. Shop around and compare lenders. Talk to your current bank or credit union, or research lenders online. Most financial institutions will have several options that could work for you, including balance transfer credit cards or personal loans. Not everyone will qualify for a debt consolidation loan. You may need a good to excellent credit score to be eligible for some options, or to receive the best interest rates.
  2. Pay off your old credit cards. If you qualify for a  new debt consolidation loan, you’ll use the money you receive to pay off your previous credit card balances or transfer your balances onto your new credit card. In some cases, your bank may send you checks you can use to pay off your current balances. That leaves you with just the new loan and the new monthly payment.

You can compare debt consolidation options, including personal loan rates, for free through Credible.

Things to consider before consolidating credit card debt

As you evaluate whether to consolidate your credit card debt, be sure to keep a few things in mind. 

  • Will your payment be lower? Take a look at your current credit card balances and interest rates, and compare them to your debt consolidation options. Taking out a new loan may only be worthwhile if your new payment is lower or you save enough on interest. Try using a debt consolidation calculator to help you figure this out. Don’t forget to factor in the fees and other costs of your new loan.
  • Can you control spending? If you’ve accumulated debt because you’re regularly spending more than you earn, consolidating that debt may not help without a change in your spending, earnings, or both. Make sure you have a balanced budget and can stick to it before you go down the consolidation path. Otherwise you run the risk of landing deeper in the hole by piling on still more debt.
  • What is your credit score? You may need a good credit score to qualify for some of the best debt consolidation options, or at least the best rates. It may be worthwhile to boost your credit score before working on consolidating credit card debt.

How does consolidating credit card debt affect your credit?

Debt consolidation’s effect on your credit depends on the method you choose and where your financial situation currently stands. Consolidating with a personal loan, for example, could help your credit score by reducing the amount of revolving debt you have. Using a balance transfer credit card, however, could hurt your score if you’re pushing your credit limit.  

You may consider working with a nonprofit credit counselor to help weigh your options and how they’ll affect your credit in the long-term. They can also help you learn ways to avoid credit problems in the future. 

How to consolidate credit card debt: 5 good options

If you’re considering credit card consolidation, here are some options to consider.

Balance transfer card

How it works

With a balance transfer, you move the amount you owe on your current credit cards over to a new credit card. Many credit card companies offer 0% balance transfer options to encourage people to use them to consolidate debt on a new card with no interest for a limited period of time (for a small fee).

Who it’s good for

A 0% balance transfer offer can be a good option for people with relatively small credit card balances who just need a small respite from interest payments to catch up. The 0% introductory rate on a balance transfer card must last at least six months if you make your payments on time. 

But you need to be disciplined and pay off your balance before the 0% period expires, otherwise you could be on the hook for interest from the entire promotional period.

Pros of balance transfer cards for debt consolidation

  • Low initial interest rate: Many balance transfer cards offer 0% or low interest rates for a period of time, often up to 18 months.
  • More money goes to reducing debt: Since you’re paying no interest for a short period, all the money you pay during this time is going toward reducing the principal of your debt instead of paying interest.
  • One payment: Just like with the personal loan, if you move all your balances to a new balance transfer credit card, you’re left with a single monthly payment.

Cons of balance transfer cards for debt consolidation

  • Fees can add up: Balance transfer fees are typically based on a percentage of the overall credit card debt you transfer. If you have large balances, this can be costly.
  • Interest rates can rise: If you don’t make all your payments, your credit card company can start raising the interest rates on your balance transfer card. After the introductory period, your rates on whatever you have left to pay will rise as well.
  • Might hurt credit score: If you’re already pushing your credit limit, using a balance transfer card could ding your credit score.

CHECK OUT THE PROS AND CONS OF BALANCE TRANSFER CREDIT CARDS

Personal loan

How it works 

A personal loan generally refers to an unsecured, fixed-rate installment loan you get from a bank, credit union, or other lender. This means you’ll pay back the loan with a set monthly payment, and it does not use your home as collateral. 

Who it’s good for

Personal loans can be a good option if you’re juggling multiple credit cards with high interest rates and high minimum payments — and have enough income to cover your new payment. It’s especially good for people with a high enough credit score to qualify for the lowest interest rates.

Pros of personal loans for debt consolidation

  • One fixed payment: If you consolidate your credit card debt with a personal loan, you’ll now have a single payment each month that won’t change over time.
  • Lower interest rates: Personal loans tend to have lower interest rates than credit cards, meaning your monthly payment will often be lower if you consolidate your credit card debt using a personal loan.
  • Unsecured loan: You don't have to risk your home if you fail to make payments, as you would with something like a home equity loan.

Cons of personal loans for debt consolidation

  • Lender fees: Personal loans typically come with significant fees that drive up your costs.
  • Higher interest rates than some options: Because personal loans are unsecured, you’ll generally pay a higher interest rate than you would on a secured loan like a home equity loan.
  • Loan terms may not benefit you: Personal loans typically must be paid back over one to seven years. This is shorter than some options, meaning your monthly payment could be higher. However, this also may be a longer period of time than making the payment on your current credit card, meaning you’ll pay more interest over time.

Credible can help you compare personal loan rates and get pre-qualified for a personal loan.

Peer-to-peer lending

How it works

Peer-to-peer lending is done through websites that match people looking for small, unsecured loans with investors wanting a return on investment. Like a personal loan from a bank, these peer-to-peer loans tend to be fixed-rate, though they are often shorter-term and smaller. 

Who it’s good for

Peer-to-peer loans can be a good option for tech-savvy people who need a small loan they can repay quickly. 

Pros of peer-to-peer loans for debt consolidation

  • Interest rates are lower than credit cards. Much like a personal loan, a peer-to-peer loan offers interest rates that are typically lower than that of a credit card — saving you money when you consolidate credit card debt.
  • Easy online applications. Since these platforms are native to the internet, they feature fast, intuitive applications.
  • Fast funding. The largest P2P lending sites advertise that their customers get their loan proceeds in just a few days.

Cons of peer-to-peer loans for debt consolidation

  • Significant fees. Peer-to-peer loans come with origination fees that reduce the amount you’re able to use for consolidating debt.
  • Good credit required. You will likely need a credit score of around 640 or higher to qualify for a peer-to-peer loan.

Credit counseling

How it works

Credit counseling is done by certified professionals trained in helping you understand your financial situation. Your counselor will be able to help you put together a strategy for reducing your money troubles. 

Who it’s good for

Credit counseling can be a good first step for someone who doesn't feel they have a good handle on their finances and isn’t sure whether consolidating their debt will help them become debt-free.

Pros of credit counseling for debt consolidation

  • Low cost. Free and low-cost credit counseling services can be found at some credit unions and nonprofits.
  • Can help reduce your monthly payment. Your credit counselor may be able to negotiate with your credit card companies to extend the period of time you have to pay off your debt, reducing your monthly payment.
  • No new loans. Credit counselors aren’t banks — they may be able to help you reduce your debt without issuing you a new loan.

Cons of credit counseling for debt consolidation

  • May charge fees. Credit counseling organizations are often nonprofits, but may still charge set-up or monthly fees to assist you.
  • Will not reduce the amount you owe. While you may get a lower monthly payment, a credit counseling agency will generally not be able to reduce the total amount you owe.

Debt management plan

How it works

A debt management plan may be an option from your credit counseling agency. Under these plans, you’ll make one payment to the counseling agency each month or each paycheck, and they’ll handle payments to all your creditors. 

Who it’s good for

Debt management plans may be a good option for people feeling overwhelmed by their credit card debt who are looking for more extensive help and guidance.

Pros of debt management plans

  • One payment. If you’re currently juggling multiple credit card payments, making a single payment to a credit counseling agency under a debt management plan may be much simpler.
  • May be able to reduce interest rates. Through agreeing to a debt management plan, your credit card company may be willing to lower your interest rate, reduce fees or give you more time to make payments.
  • Can help you re-establish credit. Completing a debt management plan can help bring your credit score back up.

Cons of a debt management plan

  • Not a quick fix. Debt management plans can take up to four years or more to complete.
  • May have to agree not to use credit. A condition of a debt management plan could be cutting up your credit cards.
  • Doesn’t apply to secured debt. While your credit cards will be covered by a debt management plan, you’ll still be on your own for secured loans like mortgages and auto loans.

LEARN ABOUT HOW DEBT RELIEF PROGRAMS CAN HELP PAY OFF YOUR LOANS

Think twice before pursuing these credit card debt options

Not all options for debt consolidation are good choices for everyone. Some may not be right for your situation, while others are almost never a good idea for anyone.

Home equity loan or HELOC

How it works

With a home equity loan, you borrow against the value you’ve built up on your home. Your home equity is the difference between how much you owe on your mortgage and how much your home is worth. A home equity loan is typically a lump sum loan that you pay back at a fixed interest rate. 

A home equity line of credit (HELOC) allows you to make multiple draws over a period of time, and is usually paid back at an adjustable rate.

Pros of a home equity loan for debt consolidation

  • Low interest rates. As a secured loan, home equity loans and HELOCs tend to have lower interest rates than you’ll find on personal loans.
  • Can be easy to get. If you have equity in your home, you’ll probably be able to tap part of it.

Cons of a home equity loan for debt consolidation

  • Risk of foreclosure: If you fail to make your monthly payments, you could lose your home to foreclosure. This isn’t possible with a credit card.
  • Steep closing costs: Home equity loans may have sizable closing costs that eat into the amount you have to settle debt.
  • Possibly harder to sell or refinance: Taking out a home equity loan could make it more likely you’ll be "underwater" on your home, or owe more on it than it is worth.

When you might consider it

You may need to use a home equity loan to consolidate credit card debt if you can’t qualify for other options but have a significant amount of equity in your home.

Cash out refinance

How it works

In a cash-out refinance, you take on a new mortgage loan for a larger amount than you currently owe. Your new mortgage pays off your old loan, and the balance comes to you as cash. 

Pros of a cash out refinance for debt consolidation

  • Low interest rates. Mortgage interest rates are generally much lower than those on personal loans and credit cards.

Cons of a cash out refinance for debt consolidation

  • You lose equity in your home. With a cash-out refinance, you now owe more on your home than you did before. This means you’ve eaten into your equity.
  • Risk of foreclosure. Failure to make payments on your new mortgage means you risk losing your home.
  • Your interest rate could be higher. While interest rates right now are at historic lows, that’s not always the case. Depending on your current interest rate, the rate you pay on a refinanced mortgage could be higher — adding up to thousands more in interest over the life of your loan.

When you might consider it

If you’re refinancing your mortgage anyway, it may be worthwhile to put some of the proceeds toward your credit card debt.

Vehicle equity loan

How it works

A vehicle equity loan uses your car as collateral. The lender will hold on to your car’s title and give you a loan based on the difference between the vehicle’s value and any money you owe on it. These loans are relatively rare, but some credit unions offer them. They are similar to car title loans — a short-term, very-high-interest loan you’ll find in several states.

Pros of a vehicle equity loan for debt consolidation

  • Fast access to cash. If you have clear title to your car, lenders typically offer to close on the loan quickly — giving you fast access to cash.
  • May offer lower rates than unsecured loans. While interest rates will vary, the rate you get on a vehicle equity loan from a credit union may be lower than what you’d pay on a personal loan or other unsecured loan.

Cons of a vehicle equity loan for debt consolidation

  • Risk of losing your vehicle. If you fail to make your payments, your lender could repossess your car.
  • High fees. You may need to pay fees to clear up your title or to process paperwork with the DMV.

When you might consider it

You might need to use a vehicle equity loan if your credit union offers them and you have a relatively new car that’s paid off.

Retirement account loan

How it works

Some 401(k)s or other retirement plans may offer loans. You may be able to borrow up to 50% of the money in your account, or $50,000 — whichever is less. Then you’ll need to pay it back within five years, with payments made at least quarterly. 

Pros of a retirement plan loan

  • No impact on credit score. There are generally no minimum credit score requirements, and borrowing from your 401(k) does not impact your credit.
  • Automatic payroll deductions. Repaying a 401(k) loan tends to be easy — the money is deducted from your paycheck.

Cons of a retirement plan loan

  • Large tax penalty if you don’t repay. If you don’t pay back a 401(k) loan properly, you could face a large tax penalty — 10% on top of regular income taxes.
  • Loan may come due early. You may have to repay the loan completely if you choose to leave your job before the end of our repayment term.
  • No investment gains. You miss out on earnings from the money you take out of your 401(k).

When you might consider it

Because of its possible impact on your tax obligation and future financial security, this option should be a last resort. You may consider a retirement plan loan if you have a stable job with a 401(k) plan that offers loans.

Borrow from insurance policy

How it works

Some types of life insurance have a "cash value" based on how much you’ve paid into the policy and how long you’ve had it. You may be able to borrow up to the cash value of your policy from your insurer.

Pros of borrowing from an insurance policy

  • May have tax advantages. Loans taken from a life insurance policy may have tax advantages, like not having to pay income tax on the money.

Cons of borrowing from an insurance policy

  • May reduce the death benefit. If you don’t pay back all the loan, the benefit received by your family when you die decreases.

When you might consider it

If you have a significant cash value in your policy and have a plan to quickly repay the loan, this might be an option for you.

A final word about how to consolidate credit card debt

Getting rid of high-interest credit card debt can be a big step toward improving your finances. And there are many good ways to go about it, including consolidating credit card debt into a lower-cost debt. 

Some options, such as personal loans or 0% balance transfer cards, may generally have more advantages than disadvantages — but everyone’s situation is different. Before you decide on a method for consolidating credit card debt, be sure to thoroughly explore all your options.

Credible can help you compare rates and offers from multiple personal loan lenders.