How to Consolidate Credit Card Debt

Picture this: You have three credit cards, each with an unpaid balance, and the interest you’re accumulating makes it feel like you’ll be carrying this debt forever.

Sound familiar? Debt consolidation might be for you.

Debt consolidation comes in several forms, but they share the same underlying concept. Multiple credit cards are paid off using a single source, leaving you with one payment to make each month — potentially with a lower interest rate.

For some borrowers, it can be an effective way to manage and pay off your credit card debt.

There’s no single best way to consolidate debt. The right option depends on your credit, your income, how much you owe and whether you own a home.

1. Use a balance transfer credit card

A balance transfer credit card lets you move debt from one — and sometimes multiple — credit cards to another card with a lower interest rate, as long as you don’t exceed your new card’s credit limit. Qualifying for a balance transfer card generally requires good credit.

Balance transfer cards are usually best used as a short-term solution, since the appeal is often tied to low promotional interest rates, like 0% for the first 12 months. Once that window ends, the card’s regular interest rate kicks in, which can be significantly higher.

This option may work best if you have strong enough credit to qualify and a realistic plan to pay off the balance before the promotional rate expires. If you can’t pay down the debt within that window, the savings may be smaller than you expected. And if you miss a payment, you may lose your promotional rate entirely.

2. Take out a bank loan

Many financial institutions offer what’s called a debt consolidation loan — essentially, personal loans that can be used to consolidate debt.

These bank loans provide enough cash to pay off all your other debts in full. You’re then left with one loan payment each month instead of several. Interest rates for debt consolidation loans are usually lower than those charged by credit cards.

A personal loan may be a good fit if you want fixed monthly payments and a clear payoff date. Qualifying can still be a challenge, though. Your credit history affects the rate and terms you may be offered, and some loan products may require collateral.

Unlike credit cards, which may allow small minimum payments, a loan typically comes with a structured repayment schedule. That means you’ll be expected to make the full required payment each month for the duration of the loan.

3. Tap your home equity

With a home equity loan or home equity line of credit (HELOC) — two common types of second mortgages — you can borrow money against your home equity and put it toward your credit card debt.

Rates on secured borrowing tend to be lower than those on other debt consolidation products, but you must have sufficient equity and be able to meet any minimum borrowing requirements.

This option may appeal to homeowners who qualify for lower rates, but it comes with more risk than unsecured borrowing. Because your home is used as collateral, the consequences can be more serious if you can’t keep up with payments.

4. Leverage a line of credit

A pre-existing line of credit can also be used to to consolidate your credit card debt. A line of credit will generally offer a lower interest rate than most credit cards, and it gives you the freedom to make interest-only payments if necessary (though that’s not a great way to hammer down your debt).

A line of credit may make sense if you need flexibility, but it can also make repayment easier to drag out. One thing to keep in mind is that lines of credit often come with variable interest rates tied to the bank’s prime rate. If that rate rises while you’re paying off your line of credit, your borrowing costs can rise, too.

None of those options work? Ask a professional for help

If none of the above options work for you, consider speaking with a credit counsellor. They can help you assess your budget, explain other debt repayment and relief options, and help you decide what to explore next, such as whether a debt management plan or consumer proposal might make sense.

Credit cards are useful tools for building credit and earning money-saving rewards. However, credit cards can make it easy to overspend, and because they typically come with high interest rates, overspending can quickly snowball into serious debt.

Many standard purchase rates in Canada are in the high teens or higher. If you carry a balance from month to month, interest charges can add up quickly and make repayment more expensive.

When your balance is high and cash is tight, it can be tempting — or unavoidable — to make use of a credit card's low monthly minimum payments. Paying the minimum can provide breathing room and preserve your credit score, but it will rarely allow you to pay off the full balance in a timely fashion.

For example, let’s say you have a balance of $5,000 on a card with 19.99% interest and a minimum payment of $160. If you stopped adding new charges and make only the minimum monthly payment, it will take you 3 years and 9 months to pay off the balance, and you’ll pay $2,119.75 in interest.

In contrast, if you pay twice as much ($320 a month), you could clear that balance in 1 year and 7 months and pay about $840 in interest — roughly $1,280 less.

When is it a good idea to consolidate your credit card debt?

If you’re making your payments every month and your credit card bills are still growing, it might be time for debt consolidation.

Debt consolidation may be worth exploring if it would lower your interest rate, simplify repayment or give you a clearer path to becoming debt-free. But if your credit is not strong enough to qualify for a better rate, or your income is too inconsistent to support the new payments, you may need to look at other options.

This may be especially true if your debt is causing emotional, physical or interpersonal stress. In that case, don’t hesitate to reach out to a qualified debt professional for advice. You don’t have to figure it out alone.