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Best Ways to Consolidate Credit Card Debt

Best Ways to Consolidate Credit Card Debt

*Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been reviewed, approved or otherwise endorsed by the credit card issuer. This site may be compensated through a credit card issuer partnership.

This article was last updated May 20, 2020. Terms and conditions may have changed. For the most accurate information, please consult the issuer website.

For consumers looking to pay off debt more quickly, save money by paying lower interest or even simplify their finances by combining multiple payments into one, consolidating credit card debt can help. We narrowed down five different ways of how to consolidate credit card debt and the pros and cons of each approach.

Use a balance transfer card to save on interest

Who a balance transfer card is best for: Consumers with good credit scores who have the resources to pay off a transferred balance within a year or two may benefit from a balance transfer card.

Since many credit cards can have APRs of 20% or higher, carrying a balance from month to month can get expensive – especially when carrying balances on multiple cards. With a 0% APR balance transfer card offer, you move high-interest debt from one or more credit cards to another card charging no interest for a specified period of time.

There is typically a balance transfer fee of 3% to 5% for each transfer that is added to the amount transferred. However, there are balance transfer cards that do not charge a balance transfer fee, but the length of those 0% promotional offers may be shorter than those that do charge a fee.

With cards that offer an intro 0% APR period on balance transfers, you’ll have a window of time where all payments go toward the debt’s principal, rather than interest charges and the principal. Some balance transfer cards offer up to 21 months of an intro 0% APR.

What to watch out for: There are a few points to be aware of when considering opening a balance transfer card. First, balance transfer cards typically require an applicant to have good credit or better. A good credit score is one that’s 670 or higher. Applicants with lower scores likely won’t be approved for cards with favorable balance transfer offers. Also, you can’t transfer balances between cards from the same issuer. For example, you can’t transfer a balance on one Discover card to another Discover card offering a balance transfer.

It’s also essential when planning a balance transfer to understand the new card might not have a high enough limit to transfer the full balance from an existing card. And even if the limit is high enough, issuers may cap the maximum amount that can be transferred. In such a situation, one solution is to transfer as much as the new card allows, and pay off the remaining balance on the original card as quickly as possible. Another option is to apply for a second balance transfer card and transfer what remains, though this creates another hard inquiry on your credit report.

Finally, after the intro 0% APR window expires, interest will be charged at the regular APR on any remaining balance. For that reason, it’s important to make a payment plan and stick to it so that the card’s entire balance is paid off before the 0% interest period ends.

Use our balance transfer calculator to check how much time you need to pay off your credit card debt.

Read: Credit Cards With No Balance Transfer Fee

Get a personal loan to wipe out credit card debt

Who a personal loan is best for: Consumers who can’t get approved for a balance transfer card or don’t want to open another card, or who are looking for a more defined repayment plan, may want to consider using a personal loan to pay off credit card debt. Personal loans may also help those who need to consolidate large amounts of debt, such as from multiple credit cards, since a balance transfer card might not have a high enough limit to transfer the entire amount.

Personal loans are offered by banks, credit unions or through online lenders. If you take out a personal loan, you’ll agree to a fixed interest rate, a fixed monthly payment amount and a set period of time for repayment. The national average interest rate on personal loans ranges from 7.63% for those with credit scores above 720, and up to 26.15% for those with credit scores ranging from 640 to 639.

What to look out for: The downside to taking out a personal loan, of course, is that you’ll pay interest. And if you don’t have a good credit score, you could end up with a high interest rate. However, a positive aspect of using a personal loan to consolidate credit card debt is having a fixed date by which you’ll pay the entire amount off. By contrast, high-interest credit card debt can linger for years, due to the fact that credit card minimum payments are typically calculated by adding up all interest charges and fees due, and only covering 1% of the debt’s principal.

Take note that some lenders may charge a penalty fee if you want to pay off a personal loan early, so read the loan terms carefully before you sign on the dotted line.

Finally, if you zero out the balances of your credit cards with a personal loan, it can be very tempting to start charging on those cards again. If you do that, you’ll face not only your loan payment, but card payments as well, which will make climbing out of debt even more difficult.

When it can make sense to get a 401(k) loan

Who a 401(k) loan is best for: If consolidating credit card debt with a balance transfer card or a personal loan isn’t an option because you have poor credit, a 401(k) loan might provide a path for getting out of debt. There’s no credit check involved for a 401(k) loan, unlike a credit card or personal loan application. And because you’re borrowing your own money, the interest rate on a 401(k) loan is likely to be lower than what you’d be offered on a personal loan.

What to watch out for: Taking out a 401(k) loan means you’re borrowing from your retirement savings. In most cases, this should be avoided, because you’re sacrificing the growth of that money until it’s repaid. Plus, not all 401(k) plans allow you to borrow against them.

If you are able to borrow from your 401(k),the maximum loan amount will be $50,000 or half of what’s vested in the account, whichever is less. An exception to the maximum of half is for accounts with less than $10,000 vested, in which case account owners are legally allowed to borrow up to $10,000 (but plans aren’t required to include this exception).

Other factors to be aware of when taking a loan of this type include:

  • If you default on a 401(k) loan and you’re younger than 59½, you’ll likely be taxed on the money you borrowed and also hit with a 10% early withdrawal penalty.
  • If you leave your job, you may be required to pay your loan off in full in a short period of time.
  • Some plans may require written consent from your spouse on loans of $5,000 or more.
  • 401(k) loans do not report to the credit bureaus and thus do not help build credit.

Despite these hurdles, a 401(k) loan can be a good option to consolidate credit card debt as they tend to offer low interest rates, which can make them an attractive option for consumers seeking to escape high-interest card debt. But before taking out a 401(k) loan, make sure to plan a budget that will prevent you from building up new credit card debt, otherwise you run the risk of hurting your retirement savings without getting out of debt.

Is using home equity to consolidate debt a good idea?

Who a home equity loan is best for: If your home is worth substantially more than what you owe on it, you may be in a good position to use home equity to consolidate debt.

A home equity loan is a loan against the value of your home, with a fixed interest rate and a set repayment period. While a home equity line of credit also borrows against the value of your home, the interest rate is variable and you don’t have to use the full amount of the credit line all at once.

A home equity loan is likely the better option than a home equity line of credit for consolidating credit card debt. Having a set amount of money disbursed at once, rather than having a line of credit to borrow from at will, is less likely to lead to overspending and more debt.

Home equity loans typically have lower interest rates than credit cards (except for 0% APR promotions), meaning that for a disciplined borrower, using a home equity loan to consolidate credit card debt could offer significant savings. Managing expenses and sticking to a repayment plan is crucial should you decide to take out this type of loan.

What to watch out for: Using home equity to consolidate credit card debt comes with a rather large drawback — if you don’t pay back what you borrow, you could lose your property.

And if you need to sell your home before you’ve paid off the home equity loan, the balance of the loan will reduce the amount you actually pocket from the sale.

Finally, know that if the value of your home rapidly drops, you could end up with an “underwater mortgage,” owing more than your home worth. If you do tap home equity to consolidate debt, borrow as little as possible to avoid this risk. (The maximum amount you can borrow is usually limited to 85% of your home’s equity, according to the Federal Trade Commission.)

Consider working with a nonprofit credit counseling agency

Who a credit counselor is best for: If tackling your debt is more than you can handle on your own, working with a nonprofit credit counseling agency could give you the tools you need to get it done. When considering a credit counseling agency, one way to evaluate its legitimacy is to make sure it’s affiliated with the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA).

While there are for-profit credit counseling companies, choosing a nonprofit can be beneficial because there are limitations and guidelines on what fees they can charge consumers, unlike for-profit credit counselors, which are subject to no such restrictions.

With the help of a nonprofit credit counseling agency, you may be able to enter a debt management plan. In a debt management plan, the agency you’re working with negotiates with your creditors to try to lower your interest rates. You make monthly payments to the agency — and the agency then pays the money to your creditors on your behalf.

What to watch out for: Don’t confuse a debt management plan with debt settlement. A debt settlement company will try to negotiate with your creditors to settle your debts for less than what you owe. Meanwhile, the company will have you deposit money in a savings or escrow account and stop paying your creditors. This will damage your credit score severely and you should expect to be assessed late fees as well. If successful, debt settlement might save you money, but it’s a risky and stressful process. Creditors will strive to collect what you owe, and if they decide not to settle your debts, they may sue you instead.

Opting for a debt management plan with a reputable nonprofit is a much better way forward.

Read How Does a Late Payment Affect Your Credit Score?

FAQs about consolidating credit card debt

Should I consolidate my credit card debt? If you’re struggling to pay down a credit card balance because of a high-interest rate, or if you have high-interest balances across multiple cards and struggling to keep up with the payments, consolidating your debt into one loan or line of credit can help you save money and relieve stress.

How can you consolidate credit card debt without hurting your credit? In the long run, consolidating your credit card debt should help you pay it down more quickly, which can improve your credit score by reducing your utilization ratio. However, debt consolidation might hurt your credit score temporarily depending on how you go about it. For example, applying for a balance transfer card will add a hard inquiry to your credit history and reduce your average age of accounts, but as you pay down the debt your score should recover relatively quickly.

What are some reputable credit card debt consolidation companies? The safest option is to work with a nonprofit credit counseling agency affiliated with the NFCC or FCAA. Depending on your situation, a credit counseling agency might set up a debt management plan for you. Beware of for-profit companies advertising debt settlement, which is different and riskier, and can inflict more damage to your credit score.

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