5 Ways to Consolidate Credit Card Debt

1. Use a Balance Transfer Credit Card

A balance transfer credit card is a type of credit card that offers an introductory 0% annual percentage rate (APR) promotion when you bring your balance from another card.

Depending on the balance transfer card, you can get up to 21 months of no interest, which could save you hundreds or even thousands of dollars.

Best for: A balance transfer card is best for people who have good credit or better—that's a FICO^® Score^☉ of 670 or higher. It's also better if you don't have a lot of credit card debt because the amount you can transfer will depend on your new card's credit limit.

Pros

• An introductory 0% APR promotion can save you time and money.
• Some cards also offer rewards and a 0% APR on new purchases.
• Most balance transfer cards don't charge an annual fee.

Cons

• You may not get a credit limit high enough to transfer all your credit card debt to the new card.
• Balance transfer credit cards typically charge an upfront fee of 3% to 5% on each transfer.
• Adding another credit card to the mix could exacerbate spending problems.

Learn more >> Balance Transfer Credit Card Mistakes to Avoid

2. Take Out a Personal Loan

Personal loans don't come with an introductory 0% APR, but they can offer a structured repayment plan, which isn't an option with most credit cards. If your credit is in good shape, you may even be able to score a lower interest rate on a personal loan than what you have on your credit cards.

That doesn't mean you need stellar credit to get approved: There are personal loans available to consumers across the credit spectrum. But you generally need good credit or better to secure a low enough interest rate to make it worthwhile.

Best for: A personal loan could be worth considering if you can't get approved for a balance transfer credit card or if the risk of overspending would be too high if you add another card to your wallet.

Pros

• A personal loan offers more repayment structure than credit cards.
• It may come with a lower interest rate.
• You pay off your credit card debt sooner.

Cons

• You're not guaranteed to get a lower interest rate.
• Some personal loans come with an upfront origination fee, which can range from 1% to 12% of the loan amount.
• There's no interest-free promotion.

Learn more >> How to Get a Personal Loan: A Step-by-Step Guide

3. Tap Into Home Equity

If you own your home, you may be able to use a home equity loan or home equity line of credit (HELOC) to consolidate your credit card debt. This option may be possible with a FICO^® Score as low as 620.

Home equity products are secured by your home, so there's less risk for the lender, and you can likely qualify for a much lower interest rate than what a personal loan could offer. However, using your home as collateral increases your risk, since you could lose your home if you miss too many payments.

Best for: Consider this option if you have decent credit and sufficient equity in your home to cover your debts and you're not concerned about the possibility of defaulting on your payments.

Pros

• Interest rates are typically low because the loan is secured by your home.
• Repayment terms are usually lengthy, which could make for a more affordable monthly payment.
• HELOCs may charge interest only during the initial draw period (usually 10 years).

Cons

• The lender can foreclose on your home if you fail to repay the loan.
• Home equity loans and HELOCs may charge closing costs of up to 5% of the loan amount. Some HELOCs may also charge annual fees.
• If the value of your home drops, you could end up owing more on it than it's worth.

Learn more >> Should You Tap Into Your Home Equity?

4. Consider a Debt Management Plan

A debt management plan is a structured repayment plan offered by credit counseling agencies. This path may be worth it if you have a large amount of credit card debt and your credit isn't in good enough shape to pursue other consolidation options.

With a debt management plan, the credit counseling agency contacts your credit card companies and may negotiate lower interest rates and monthly payments. Then, you'll make one monthly payment to the agency, which will distribute payment to your various creditors.

Debt management plans typically last three to five years and may come with modest upfront and ongoing fees.

Best for: A debt management plan can be a great choice for people who can't qualify for other consolidation options. It's also worth it if you're struggling to keep up with your monthly payments.

Pros

• You may be able to save money on interest.
• You'll only have one monthly payment.
• It doesn't require a good credit history.

Cons

• You'll be required to close your credit card accounts, so you can't continue to use them.
• You need to make your payments on time to keep the plan.
• Some credit card companies may refuse to participate.

Learn more >> Debt Settlement vs. Debt Management: Which Is Better?

5. Withdraw From Your 401(k)

It may be possible to take money from your 401(k) plan as a withdrawal or a loan and use it to pay down credit card debt. However, things can get complicated and costly if you're not careful.

If your plan provider offers 401(k) loans, the interest you pay goes to your account and there's no tax penalty, so it's a better option than an early withdrawal because you won't need to pay taxes or a penalty. However, if you have a 401(k) loan and leave your job for any reason, the loan may become due immediately, and if you can't pay, it'll be treated as an early withdrawal. Also, you lose out on any earnings you may have had if you'd left the money in your account.

Best for: You might consider a 401(k) loan if your credit is in poor shape and you don't have other loan options for consolidation.

Pros

• It doesn't require a credit check or show up on your credit reports.
• Loans may charge lower interest rates than credit cards.
• Interest paid on a 401(k) loan goes into your account.

Cons

• Borrowing or withdrawing from your 401(k) could derail your progress toward retirement.
• Early withdrawals from a 401(k) can end up being costlier than credit card interest.
• Leaving your job or getting laid off could make things much worse.

Learn more >> What Happens to a 401(k) Loan if You Change Jobs?

Should I Consolidate My Credit Card Debt?

The decision of whether or not to consolidate credit card debt is ultimately up to you. It's important to research your options and consider the advantages and disadvantages of each.

That said, here are some situations where it could make sense, as well as some where you might want to think twice.

Consider consolidating your credit card debt in these scenarios:

• Your credit card debt burden is significant.
• You can qualify for a lower interest rate.
• You're motivated to stick to your debt payoff plan.
• Your monthly payments are stretching your budget too thin.
• You're carrying high-interest balances on multiple cards.
• You struggle to keep track of your monthly payments.

Think twice about consolidating your credit card debt in these scenarios:

• You can easily pay off your credit card balances in under a year.
• You can't qualify for better terms.
• You're concerned about the drawbacks of the options you're considering.
• You haven't addressed the underlying causes of your credit card debt.
• You're unable to keep up with payments, even on a debt management plan.
• You believe consolidation could do more harm than good.
• You'd be tempted to run up debt again.

Look Into Strategies to Pay Off Credit Card Debt

Debt consolidation is not the only way to pay off credit card debt. An excellent alternative to consolidating your credit card debt is to employ the debt snowball or debt avalanche method to pay down your balances faster. These approaches help you accelerate debt payoff but don't require taking out additional debt to do it.

Debt Snowball

With the debt snowball method, you target the card with the lowest balance and make extra payments toward that account while paying just the minimum on all other cards.

Once you've paid off that balance, move on to the next-lowest balance and add what you were paying on the first card to pay it off even faster—hence the "snowball" effect. You'll continue this practice until you've paid off all of your credit card balances.

Debt Avalanche

The debt avalanche method works similarly to the debt snowball method. The only difference is that you'll focus on the cards with the highest interest rates first instead of the lowest balances.

The debt snowball method may be a better option if you're struggling to get motivated to pay off your debt. Paying off small balances quickly can give you small wins early, making it easier to build momentum. The debt avalanche method, on the other hand, can save you more money because you're getting rid of debts with higher interest first.

Frequently Asked Questions

• How Much Can You Save With Debt Consolidation?

  Your savings potential will depend on your current credit card terms and the terms of the consolidation option you choose.

  Example: Let's say you have $10,000 in credit card debt with an average interest rate of 23%. If you could afford to put $500 a month toward the debt, it would take you 26 months, and you'd pay $2,733 in interest.

  However, let's say you were to apply for a balance transfer credit card with a 21-month introductory 0% APR promotion and a 5% balance transfer fee. The fee would be added to your balance, giving you $10,500 in debt to repay. With $500 a month in payments, you'd pay off the debt by the end of your promotional period, saving you more than $2,200 in interest charges.

• What Happens to My Old Credit Cards After I Consolidate Debt?

  With most consolidation options, your old credit cards will remain open. The only exception is if you enter a debt management plan, in which case your card issuers may close your accounts.

  If you're not required to close your accounts and you're not worried about racking up more debt on your old cards, keeping them open could help your credit. However, if you're concerned about overspending, it may make sense to close some or all of them—or, at a very minimum, request a lower credit limit.

• How Can You Consolidate Debt Without Affecting Your Credit Score?

  The only way to consolidate debt without affecting your credit score at all is to use a 401(k) loan, which doesn't involve a credit check or report to the credit bureaus. However, 401(k) loans may carry other risks that aren't worth it.

  With other consolidation options, the process can affect your credit score negatively in the beginning but may have an overall positive effect in the long term. When taking out a loan or credit card, for instance, the lender's hard inquiry into your credit can knock a few points off your credit score temporarily, and the new credit account itself will affect your average age of accounts.

  Using a balance transfer credit card has a higher likelihood of damaging your credit than other options, at least temporarily. This is because transferring a large amount of debt that uses most or all of the new card's available credit could result in a higher credit utilization rate and a lower score. But as you pay down the debt, you'll see your credit score rebound.

Above All, Focus on Your Goal

Debt consolidation can come in many forms, and some options may be better than others for your situation. The most important thing is that you make progress on eliminating your debt. The faster you can pay down your credit card balances, the sooner you'll have more cash flow to spend how you want.

As you work on consolidating and paying down your credit card debt, continue to check your credit score regularly to make sure your hard work is paying off.