Debt consolidation is a strategy to roll multiple old debts into a single new one. Ideally, that new debt has a lower interest rate than your existing debt, making payments more manageable or the payoff period shorter.
The option that best suits you depends on your overall debt load, credit score and history, available cash and other aspects of your financial situation, as well as your self-discipline. Consolidation works best when your ultimate goal is to pay off debt.
The four most effective ways to consolidate credit card debt are:
1. 0% balance transfer card
This type of credit card charges no interest for a promotional period, often 12 to 18 months, and allows you to transfer all your other credit card balances over to it. You’ll need a good to excellent credit score — above 690 — to qualify for most cards.
You’ll need a good to excellent credit score — above 690 — to qualify for most cards.
Make a budget to pay off your debt by the end of the introductory period, because any remaining balance after that time will be subject to a regular credit card interest rate.
Most issuers charge a balance transfer fee of around 3%, and some also charge an annual fee. Before you choose a card, calculate whether the interest you save over time will wipe out the cost of the fee.
- 0% introductory interest rate
- Requires good to excellent credit
- Usually carries a balance transfer fee
- Interest kicks in typically after 12 to 18 months
2. Personal loan
You can use an unsecured personal loan from your local bank or credit union or an online lender to consolidate credit card or other types of debt. The loan may give you a lower interest rate on your debt or help you pay it off faster.
The lowest personal loan rates go to those with the best credit; rates top out at 36%.
NerdWallet recommends visiting your local credit union first. Most credit unions offer their members flexible loan terms and lower interest rates than online lenders, especially if you have a low credit score. The maximum annual percentage rate at a federal credit union is 18%.
Online lenders typically let you apply for a debt consolidation loan without affecting your credit score. Most will give you a rate without a “hard inquiry” on your credit, unlike many banks and credit unions.
For online lenders, the lowest rates go to those with the best credit; rates top out at 36%. Lenders don’t charge fees for paying off your loan early, but they may charge upfront origination fees that range from 1% to 5% of your loan. Some also send money directly to your creditors, increasing the odds of successful debt consolidation.
- Fixed interest rate and monthly payment
- Fixed payment period
- Lowest rates go to those with excellent credit
- May carry an origination fee
3. Home equity loan or line of credit
If you’re a homeowner, you can take out a loan or line of credit on the equity in your home. A home equity loan is a lump sum loan with a fixed interest rate, while a line of credit works like a credit card with a variable interest rate. You can use that money to pay off your credit cards or other debts.
A HELOC typically requires interest-only payments during what’s known as the draw period, which can range from five to 20 years but is typically 10 years. That means you’ll need to pay more than the minimum payment due to reduce the principal and make a dent in your overall debt.
Since both types of loans are secured by your house, you could lose it if you don’t keep up with payments.
- Lower interest rate than an unsecured loan
- Does not require good credit
- Failure to pay could result in losing your house
- Repayment terms can be 10 years or longer
4. 401(k) loan
If you have an employer-sponsored retirement account, it’s not advisable to take a loan from it, since doing so can significantly impact your retirement. However, if you’ve ruled out balance transfer cards and other types of loans, this may be an option for you.
One benefit is that this loan won’t show up on your credit report. But the drawbacks are significant: If you can’t repay, you’ll owe a hefty penalty plus taxes on the unpaid balance, and you may be left struggling with more debt.
401(k) loans typically are due in five years, unless you lose your job or quit, in which case they’re due in 60 days.
- Lower interest rate than an unsecured loan
- You borrow money from yourself
- Loan isn’t counted on your credit report
- Reduces your retirement fund
- Heavy penalty and fees if you can’t repay
- If you lose or leave your job, the loan is due in 60 days
Updated March 12, 2018.