3 ways to consolidate credit card debt

Paying down credit card debt can be achieved through one of three credit consolidation methods: balance transfers, home equity, and personal loans.  (Shutterstock)

Credit cards can be useful financial tools. Unfortunately, they can also create financial hardship if you don’t pay off your balances on time. Americans paid an estimated $120 billion in credit card interest and fees from 2018 to 2020, averaging about $1,000 per year for each household, according to the Consumer Financial Protection Bureau (CFPB).

With 83% of adults holding at least one credit card and most averaging 3.84 credit card accounts, it’s easy to see how people accumulate debt. If you’re carrying credit card balances from month to month, these three credit card consolidation strategies may help you save money and pay down your debt sooner.

A personal loan is one way to consolidate credit card debt. Credible makes it easy to see your prequalified personal loan rates from various lenders, all in one place.

• Refinance with a balance transfer credit card
• Take out a debt consolidation loan
• Use your home’s equity
• Ways to stay debt-free

1. Refinance with a balance transfer credit card 

While it may sound contradictory, you can use a credit card to help pay off your credit card debt. A balance transfer credit card allows you to consolidate your existing credit card debt onto a single, new credit card.

Refinancing with a balance transfer credit card can be one of the cheapest ways to pay off credit card debt if used effectively. Many credit card companies offer incentives for opening a balance transfer credit card, such as a 0% introductory APR on balance transfers for a certain period of time. This allows you to pay down your credit card debt with a single monthly payment without accumulating more interest. 

But you typically need excellent credit to qualify for a card with a 0% APR offer, and you’ll only receive this incentive for a limited time. If you’re still carrying a balance when the promotional period ends, you’ll start accruing interest at the card’s regular rate, which can be high. You may also be subject to balance transfer fees, which typically range from 3% to 5% of each balance you transfer.

Speak to your credit card issuers about ways you can negotiate your credit card debt before taking out a new card. But be aware, paying less than you owe on credit cards or any other type of debt can adversely affect your credit.

2. Take out a debt consolidation loan

A debt consolidation loan is an unsecured personal loan that you can use to consolidate multiple sources of high-interest debt, like credit cards. These loans generally have a fixed interest rate, don’t require collateral, and come with fixed monthly payments. They can also help boost your credit score by lowering your credit utilization and adding to your credit mix (the different types of credit products that you have).

If you have good credit, you may be able to get a lower interest rate on a debt consolidation loan than what you were paying on your credit cards. The better your credit, the lower the rate you’ll receive. 

But you may have to pay fees when you take out a debt consolidation loan, like origination fees for processing the loan or prepayment penalties for repaying the loan ahead of schedule. 

Consolidating multiple monthly payments into a single payment can help you better manage your debt. Follow these steps to take out a debt consolidation loan: 

1. Check your credit. Request free copies of your credit reports from the three main credit bureaus by visiting AnnualCreditReport.com. Dispute any errors in your credit report, and consider increasing your credit score before applying for a loan if it might earn you better terms.
2. Shop around and compare. Compare debt consolidation loan rates from multiple lenders, both online and from your bank or credit union. By comparing their interest rates, terms, fees, and other factors, you can choose the loan that offers the most benefits for your unique situation.
3. Apply. Once you’ve chosen a lender that works for you, it’s time to officially apply for the lonan. You’ll need to provide documentation to verify your employment and income, such as pay stubs and W-2s. If you’re having trouble qualifying for a debt consolidation loan on your own, explore the option of adding a cosigner to your application. It can increase your approval odds and might help you get a better interest rate. Keep in mind that using a cosigner makes them financially obligated to repay the loan if you fail to do so. Any missed payments will also negatively affect their credit.

Credible makes it easy to compare personal loan rates from various lenders, and it won’t affect your credit.

3. Use your home’s equity

You also have the option of using your home’s equity to pay off your credit card debt. You can do this in two ways: through a home equity loan or a home equity line of credit (HELOC). 

• A home equity loan is often referred to as a second mortgage that allows you to borrow no more than 80% of your home’s equity. Home equity loans typically have fixed interest rates and need to be repaid by a predetermined time. This loan is secured by your home, which means if you fail to repay it, your lender can foreclose on your home.
• A HELOC is similar to a credit card: You can draw on this revolving line of credit multiple times up to a certain amount. Like home equity loans, this financing is secured by your home, which means you could lose your home if you fail to repay the credit line. Unlike home equity loans, HELOCs often have variable interest rates and payment schedules, so it’s more difficult to plan out a consistent repayment schedule.

The CFPB notes that even though using your home’s equity is one way to consolidate your debt, many people aren’t able to lower their overall debt by taking on more debt unless they also lower their overall spending. 

Ways to stay debt-free

Effectively managing your debt is the first step to staying out of debt in the future. Here are some ways to help you stay debt-free going forward:

• Create a budget. Write down all your monthly expenses and subtract that amount from your gross monthly income. This will give you an idea of where your money is going. Look for additional opportunities to save or for places where you can cut back on expenses to save even more. Review your budget periodically to see if you need to make any changes to keep you on track.
• Focus on building your savings. Aim to save three to six months’ worth of living expenses in an emergency fund. If you have an unexpected expense in the future, you can use money from your emergency fund to cover it instead of charging additional credit card debt. Consider asking for a raise at work or taking on a side hustle to help you save even faster.
• Consider nonprofit credit counseling. A credit counselor from a nonprofit agency can discuss your financial situation with you. They’ll help you develop a personalized plan and give you tools for staying out of debt. Free or low-cost counseling services are available through many credit unions, nonprofit agencies, and religious organizations. You can also contact your local state Attorney General to find reputable credit counselors where you live.