How to Consolidate Credit Card Debt

You can pay off the plastic in your wallet using funds from a balance transfer card, personal loan or other means. But which is best for you?

Written by Andrew Pentis / May 24, 2022

Quick Bites

  • Credit card debt consolidation doesn’t erase your debt. Rather, it creates a single new balance, ideally with friendlier repayment terms.
  • Some debt consolidation strategies require that you have good to great credit, while others ask that you have equity in your home or retirement savings to spare.
  • Borrowers with poor or limited credit can opt for a debt management plan, set up by nonprofit credit counseling agencies.
  • Whether or not you should consolidate credit card debt depends on whether it will improve your situation after accounting for fees and other costs.

Are you receiving a handful of credit card bills in the mail, and are sick of keeping track of interest rates, fees and how much to fork over to each creditor? That’s what makes consolidating credit card debt such an appealing option for many borrowers: a single monthly payment to a single company.

Keep in mind that the best strategies for debt consolidation require good credit or a creditworthy cosigner. There are also pitfalls to be wary of. “The biggest risk is paying off credit card debt with a loan or balance transfer, then running up the balances on the same accounts,” says Bruce McClary, a vice president of communications at the National Foundation of Credit Counseling. “That can lead to some serious financial problems.”

If you go about consolidating credit card debt smartly, however, it could help you organize your repayment, lower your interest rates or help you become debt-free faster. There’s also less stress in a more straightforward repayment strategy. Here’s how the consolidation process works and what your options are—no matter what your credit score is.

Inside this article

  1. How consolidating debt works
  2. Ways to consolidate credit cards
  3. More consolidation strategies
  4. FAQs about debt consolidation

How does consolidating credit card debt work?

If you have credit card debt (and perhaps outstanding loans), you’re already familiar with the process of obtaining credit. Potential lenders use factors like your credit history and debt-to-income (DTI) ratio to offer financial products at certain interest rates and repayment terms (the length of time you have to pay off the balance).

It typically works the same way when you consolidate credit card debt. Lenders review your credit history and DTI, among other factors, to determine your eligibility and rates.

With consolidation, you might apply for a personal loan, for example, and use the funds to pay off your existing balances. Instead of $5,000 worth of credit card balances, for example, you’d have a $5,000 loan owed to one lender.

Ideally, your debt consolidation loan would have a lower APR than the average rates of your old cards. (You can calculate the potential savings of debt consolidation loans with a calculator like Wells Fargo’s.)

If you don’t have, say, the credit score required to qualify for debt consolidation loans and similar strategies, there are other options. You could opt for secured financing, whereby you post collateral (in lieu of credit history) that could be seized if your repayment goes awry. A home or auto equity loan is an example of secured financing.

Instead of working with a credit card company or loan officer, you could also go to a nonprofit credit counseling agency. A certified credit counselor can set you up with a debt management plan to consolidate and repay your balances over time. That’s a good strategy for getting out of debt long-term, and it’s accessible to everyone.

8 ways to consolidate credit card debt

StrategyBest option for borrowers
1. Balance transfer credit card With good credit who have the cash-flow to repay their new balance before the introductory 0% APR period expires
2. Personal loan With good credit (or a creditworthy co-applicant) who can realistically repay their new debt within two to five years
3. Tap your home’s equity Who have paid off a portion of their mortgage and don’t foresee falling behind in repayment or needing the tapped funds for home repairs
4. Borrow from your retirementWith a long time horizon before retirement who plan to stay with their employer (and the associated retirement plan) for an extended period
5. Debt management plan Without good credit who can stomach a three-to-five year wait to become debt-free, and want to break their cycle of debt
6. Tap equity in your car With smaller outstanding credit card balances that could be covered by the partial value of an owned vehicle
7. Peer-to-peer lending Who may struggle to qualify for debt consolidation loans from traditional banks and credit unions
8. Borrow from family, friends Who are comfortable reaching out to loved ones who can help (just be sure to have a repayment plan in place)

1. Balance transfer credit card

If you have credit card debt already, it might seem counterintuitive to take on yet another credit card. You could use a balance transfer card, however, to pay off and replace your original debt with one consolidated balance. To qualify for these cards, which come with 0% introductory APRs for a limited time, you’ll need a qualifying credit score.

Also: “You will need to make sure that the terms are more favorable than what you have now,” says McClary. “While introductory ‘teaser’ rates can be a strong selling point, the long-term interest rates and fees are what you should check before you settle on a transfer offer.”

In other words, prepare for the worst-case scenario that you’re not able to pay off your consolidated balance before the 0% APR, promotional period expires (typically after 12 to 18 months). Also, be mindful of balance transfer fees that could eat into the affordability of this strategy.

Pros

  • Paying off your debt in a short period (i.e. before the 0% APR lapses) could save a lot of money on interest
  • Many cards won’t charge an annual fee (at least during the introductory period)

Cons

  • Balance transfer fees range from 3% to 5% of the transfer amount
  • Your credit limit may not be enough to pay off all your original debt
  • Limited to creditworthy applicants

2. Personal loan

You can also consolidate credit card debt via a lender, such as a bank, credit union or online company. Payoff is one example of a lender that specializes in personal loans to pay off credit cards, offering typical repayment terms of two to five years.

Unlike a credit card, which is a line of credit, a personal loan is funded in one lump sum and repaid in equal-sized installments. Personal loans carry lower interest rates than credit cards, so you could save money if you qualify for a loan at a reasonable interest APR and repay it over time.

Pros

  • Reputable lenders allow the option to prequalify, so you can confirm your eligibility and check rates without committing
  • Funds can often be sent to your credit card companies directly
  • Installment loans are generally easier to repay than revolving debt because you pay off your balance without adding to it, as you might with a credit card

Cons

  • Loan origination fees can account for up to 8% of the loan amount (varies by lender)
  • Limited to creditworthy applicants
  • Lower monthly payments likely means paying more overall because there’s more time for interest to accrue and capitalize onto your balance

3. Tap your home’s equity

If you own more than 20% of your home (or your home has gone up in value since you bought it), you could draw on your equity. Home equity loans allow you to borrow fixed amounts, while a home equity line of credit lets you borrow variably, or as needed.

The risk of borrowing against your house or property is that if you fall behind on repayment, you could risk losing your most valuable asset. It would also be worth speaking to your tax preparer or an advisor about any impact to your returns.

This strategy “raises the stakes when your unsecured debt becomes collateralized,” warns McClary. “Missed payments could lead to foreclosure when your house is on the line.”

Pros

  • Qualify for lower APRs, more attractive terms because the debt is secured by your home

Cons

  • Limited to homeowners with sufficient equity
  • Runs the risk of losing your home to foreclosure if you struggle in repayment
  • Loan closing costs can run into the hundreds or thousands of dollars
  • Could leave you shorthanded to pay for emergency home repairs (the typical reason to tap your home’s equity)
  • Could make it harder to sell your home or refinance your mortgage, particularly if the property value declines (because you own less of the home than before)

4. Borrow from your retirement

If you’ve been stuffing your retirement accounts, you might consider the possibility of accessing those funds. Though it would be wise to discuss this option with a certified financial professional, it could be less risky if you’re young and have a longer time horizon before retirement. If you’re in your 30s or 40s, for example, you would have more opportunity than someone in their 50s or 60s to repay what you borrow or replenish it via other means.

Talk to your employer’s retirement plan provider about whether it offers a loan option and at what terms. Also, talk through fine print specific to your account type, such as 401(k) early withdrawal penalties. Most notably, there’s a 10% penalty—plus income taxes—on non-qualifying withdrawals.

Pros

  • Avoid taking on debt from a typical financial institution where credit checks are required
  • Borrow at lower interest rates than you might face on credit cards and typical loans—and depending on your retirement plan, that interest may be headed back into your account anyway

Cons

  • Risky option to raid retirement accounts, especially if you’re close to retirement age
  • Taxes and penalties if you don’t repay the loan within five years or leave your job before you’ve paid back the loan

5. Debt management plan

Fortunately, there are also ways to consolidate credit card debt with bad credit—and without continuing your reliance on debt. Someone at a nonprofit credit counseling agency can work with you to develop a debt management plan, whereby you consolidate your outstanding balances into an affordable monthly payment, which you then typically pay over a three-to-five-year period.

Debt management plans aren’t an overnight fix, to be sure, but they’re accessible to all borrowers. If you’re interested in this route, check with a NFCC-member agency. (Be wary of unaffiliated, self-described debt settlement companies that may scam you into paying a fee for settling your debt or make other promises.)

Pros

  • Get on the pathway toward ending your debt cycle
  • Good credit history isn’t required
  • Avoid the kind of borrowing (credit cards, loans, etc.) that may have caused you problems in the past
  • Work with a low-cost, certified credit counselor to develop a sound strategy

Cons

  • Takes longer to clear your debt (typically three to five years) and improve your credit report
  • Not all creditors participate in debt management plans

More ways to raise funds and consolidate credit card debt

6. Tap equity in your car

Like borrowing from the cash you’ve poured into a home, you could borrow against the equity you have in your car, and at lower interest rates than personal loans. Of course, the value of your car is likely much less than the value of a home, so you might not be able to borrow enough to pay off your credit card debt.

7. Peer-to-peer lending

Through online platforms like Prosper and Peerform, you can meet investors willing to fund your debt consolidation in exchange for the steady returns of your payments over time. Though it may be easier to get an unsecured personal loan in this fashion, tread carefully. Make sure you understand the exact terms of repayment, which may be set by the platform or the individual lender, before proceeding.

8. Borrow from friends or family

Though not debt consolidation per se, borrowing from friends or family could help you exchange a legally-binding debt for a debt with someone you trust (and who trusts you).

There are real risks of mixing money into your personal life, so be sure to lay out clear ground rules at the start. You and your “personal lender” should review when and how the debt will be repaid. Also, cover worst-case scenarios, discussing what would happen if you suddenly became unable to make good on your promise of repayment.

Tip: How to Talk to Your Spouse About Money

You could also create a crowdfunding page via platforms like GoFundMe to share among your friends and family.

FAQs: Credit card debt consolidation

Should you consolidate your credit card debt?

It could make sense to consolidate credit card balances for a few reasons. It would give you a single monthly payment to one creditor, simplifying your debt payoff plan. More practically, it could also get you a lower interest rate, which could either lower your monthly payments or end your debt faster. That said, fees and other costs of consolidation could eat into your savings.

How is credit card debt refinancing different from consolidation?

Credit card debt refinancing and consolidation are often used interchangeably. The difference is that through refinancing you typically use your positive credit history or creditworthy cosigner or co-borrower to refinance and consolidate your debt accounts to a credit card with a lower interest rate. Consolidation, meanwhile, would simply group your debt, but not necessarily at more attractive terms.

What about secured personal loans for credit card debt?

Like with other secured forms of financing, such as a home or auto equity loan, you can apply for a secured personal loan to pay off credit card debt. The risk, though, is that failing to repay the secured personal loan would mean that your collateral could be seized.

Will consolidating credit card debt harm my credit score?

Taking on new debt, whether in the form of a balance transfer card, personal loan or other product, could temporarily ding your credit score. Once you use the newly borrowed funds to pay off your original debt and begin making monthly payments toward your newly consolidated account, your score should only improve. Your credit utilization ratio will come back down to earth, and building a consistent payment history will drive your score upward.

Article Sources
  1. "What do I need to know if I’m thinking about consolidating my credit card debt?" Consumer Financial Protection Bureau, June 7, 2017, https://www.consumerfinance.gov/ask-cfpb/what-do-i-need-to-know-if-im-thinking-about-consolidating-my-credit-card-debt-en-1861/.
  2. “Considering a loan from your 401(k) plan?” IRS, https://www.irs.gov/retirement-plans/considering-a-loan-from-your-401k-plan-2.

About the Author

Staff editor Andrew Pentis headshot

Andrew Pentis

I have used my journalism background to write about personal finance topics since 2015. My work has appeared in over 40 publications, including LifeHacker, U.S. News & World Report and Marketwatch.

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