Credit card debt consolidation is a strategy that takes multiple credit card balances and combines them into one monthly payment. Ideally, the new debt has a lower annual percentage rate than the rates on your credit cards, reducing interest costs, making payments more manageable or shortening the payoff period.
The best way to consolidate your credit card debt depends on how much debt you have, your credit score and history, whether you have home equity or investments in a 401(k) account and your self-discipline. Consolidation works best when your ultimate goal is to pay off debt.
Credit card consolidation may hurt your credit score if the lender checks your credit with a hard inquiry. However, your score will drop only a few points. Pay off all of your debts on time and keep your credit card balances low to improve it over time.
The five most effective ways to pay off credit card debt are:
- Refinance with a balance transfer credit card.
- Consolidate with a personal loan.
- Tap home equity.
- Consider 401(k) savings.
- Start a debt management plan.
1. Credit card refinance
- 0% introductory APR period.
- Requires good to excellent credit to qualify.
- Usually carries a balance transfer fee and may have an annual fee.
- Higher APR kicks in after 12 to 18 months.
Also called credit card refinancing, this option transfers credit card debt to a balance transfer credit card that charges no interest for a promotional period, often 12 to 18 months. You’ll need good to excellent credit (690 or higher on the FICO scale) to qualify for most balance transfer cards.
Most issuers charge a balance transfer fee of 3% to 5% of the amount transferred, 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.
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.
2. Credit card consolidation loan
- Fixed interest rate and monthly payment means your payments won’t change.
- Low APRs for good to excellent credit.
- Direct payment to creditors at online lenders.
- Harder to get a low rate with bad credit.
- Online loans may carry an origination fee.
- Credit unions require membership to apply.
You can use an unsecured personal loan from a credit union, online lender or bank to consolidate credit card or other types of debt. The loan should give you a lower APR on your debt or help you pay it off faster.
Credit unions are not-for-profit lenders that may offer their members more flexible loan terms and lower rates than online lenders, especially for borrowers with fair or bad credit (689 or lower on the FICO scale). The maximum APR charged at federal credit unions is 18%.
Online lenders typically let you pre-qualify for a credit card consolidation loan without affecting your credit score. Most will give you an estimated rate without a hard inquiry on your credit, unlike many banks and credit unions. The lowest rates offered by online lenders go to those with the best credit.
Some online lenders may charge a one-time origination fee from 1% to 8% of the loan amount to cover the cost of underwriting the loan. That fee is included in the loan’s APR.
They may also offer direct payment to creditors, which means the lender sends your loan proceeds to your creditors for you, simplifying the credit card consolidation process.
Bank loans provide competitive APRs for good-credit borrowers, and benefits for existing bank customers may include larger loan amounts and rate discounts. Applications may require an in-person visit to a branch.
Use our debt consolidation calculator to see your options for consolidating your credit cards and to estimate your savings with a debt consolidation loan.
3. Home equity loan or line of credit
- Lower interest rates than unsecured personal loans.
- May not require good credit to qualify.
- Long repayment period, which keeps payments lower.
- You need equity in your home to qualify and a home appraisal is required.
- Secured with your home, which you can lose if you default.
If you’re a homeowner, you may be able to take out a loan or line of credit on the equity in your home and use it to pay off your credit cards or other debts.
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.
A HELOC often requires interest-only payments during what’s known as the draw period, which is often the first 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 the loans are secured by your house, you’re likely to get a lower rate than what you would find on a personal loan or balance transfer credit card. However, you can also lose your home if you don’t keep up with payments.
4. 401(k) loan
- Lower interest rates than unsecured loans.
- No impact on your credit score.
- It can reduce 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.
If you have an employer-sponsored retirement account like a 401(k) plan, it’s not advisable to take a loan from it, since doing so can have a significant impact on your retirement. Consider it only after you’ve ruled out balance transfer cards and other types of loans.
One benefit is this loan won’t show up on your credit report, and there’s no impact to your credit score. 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.
As well, 401(k) loans typically are due in five years, unless you lose your job or quit, then they’re due in 60 days.
5. Debt management plan
- Fixed monthly payments.
- May cut your interest rate by half.
- Startup fees and monthly fees are common.
- It may take three to five years to repay your debt.
Debt management plans roll several debts into one monthly payment at a reduced interest rate. It works best for those struggling to pay off credit card debt, but who don’t qualify for other options because of a low credit score.
Like other credit card consolidation options, debt management plans require you to have a regular income. If your debt can’t be repaid within five years, then bankruptcy may be a better option.
You can find a debt management plan through a nonprofit credit counseling agency.