5 ways to consolidate credit card debt

Credit card debt can spiral out of control quickly if left unchecked, especially if you’re carrying balances on multiple cards with high interest rates. Many Americans rely heavily on credit cards to manage their budget, and paying down multiple balances with high interest rates can feel overwhelming.

Exploring debt consolidation could help. Two common ways to consolidate are personal loans or balance transfer credit cards. These methods may save you money in interest charges, help you get out of debt faster, and make monthly budgeting simpler.

Here are 5 consolidation options to explore.

Credit card consolidation loan (personal loan)

These are unsecured personal loans you can use to pay off your credit card debt. They’re available from credit unions, banks and online lenders and can feature low APRs at a fixed interest rate depending on your creditworthiness.

Unlike a balance transfer card, this type of loan doesn’t come with a 0% intro period, and you may need to pay an origination fee to take out the loan depending on the loan terms. Based on your credit score, your loan amount can prove much higher than the amount you could consolidate with a balance transfer card.

Balance transfer credit card

A balance transfer credit card allows you to refinance credit card debt by moving your existing debts onto a new card with a lower or introductory APR. They’re an ideal solution for credit card debt as many balance transfer cards feature a generous 0% introductory period, ranging anywhere from six to 21 months of 0% interest on your consolidated debt. But to qualify for the best cards available, you need strong creditworthiness.

Home equity loan or home equity line of credit

Abbreviated as HELOC, a home equity loan or line of credit lets you take out a loan or line of credit based on your home’s equity. Loans obtained this way typically possess fixed interest rates, while a line of credit is variable. This option is useful if you have equity in your home, but failure to make your payments means you might lose your home.

Like a personal loan, you may need to pay an origination fee on this type of debt relief.

401(k) loan

Though inadvisable, you can take out a loan from your employer-sponsored 401(k) plan. It’s best to think of a 401(k) loan as a last resort — that money is much more valuable in your 401(k) account as it accrues interest. You’re usually required to pay off this kind of loan within five years, and missing payments can lead to big fees and penalties.

Debt management plans

Though not a loan, a professional debt management plan can help you pay off your credit card debts with assisted guidance. Speak to a credit counselor to understand your options. Often, you can walk away with a plan that can take anywhere from three to five years to pay off in full.

What is credit card debt consolidation?

Sometimes referred to as credit card refinancing, credit card debt consolidation is a method of managing your credit card debt. It works by combining your credit card balances to a new balance with a new interest rate and repayment terms. Usually, it takes three steps to consolidate your credit card debt:

1. Apply for a consolidation method equal to the amount you owe your credit card companies.
2. Use the new loan funds to pay off your credit card balances — some lenders can send the funds directly to your credit card providers.
3. Make a single monthly payment on your new personal loan until the repayment term is up.

What type of debt consolidation solution should I get?

What method you use to consolidate your credit card debt depends on your financial situation.

Balance transfer credit cards: Best if you have modest debt and can pay down your credit card debt in 12 to 18 months.

Debt consolidation or HELOC loans: Best if you have moderate debt that will take more than 12 to 18 months to pay off.

Debt management plans and credit counseling: Best if you owe more than 50% of your annual income or have a poor credit score. A poor credit score means you’re more likely to qualify for a loan with a high annual percentage rate.

The benefits of consolidating your credit card debt

There are several benefits to consolidating your credit card debt.

• Debt consolidation loans can potentially increase your credit score both long- and short-term.
• It can help you save money by giving you a lower interest rate and fixed monthly payments.
• One monthly payment is easier to keep track of than multiple due dates on your credit card accounts.
• Fixed monthly payments put you on a schedule to get out of debt faster.
• Fixed rates make it easier to budget for loan payments since rates stay the same each month.

How credit card consolidation affects your credit score

There are several ways consolidating your credit card debt can improve your credit:

1. Paying down your credit card accounts with a loan lowers your credit utilization ratio, or the amount of available credit you have in use. Having a low credit utilization ratio is the second-most important factor in a good credit score.
2. Adding installment credit like personal loans can also increase your score by adding a new type of account to the mix. This is especially true if your credit profile is mostly revolving credit accounts — like credit cards.
3. Opening another credit account also helps build your credit history, which can increase your credit score.
4. Paying off your loan on time adds to your positive payment history, which is the most important factor in your credit score.

However, debt consolidation can initially slightly hurt your credit. Lenders typically run a hard credit inquiry when you apply, which shows up on your credit report and can temporarily lower your score. If you miss a payment, that can affect your credit for up to seven years.

Debt consolidation requirements include good credit and regular income

Typically, borrowers need to meet the following eligibility criteria to qualify for a debt consolidation loan:

• Between $2,000 and $100,000 in unpaid credit card debt and unsecured personal loans
• Good or excellent credit — that is, a score of at least 670 in most cases. You may still qualify with a lesser credit score, but the best loan rates demand a good or excellent score
• Annual income that’s at least twice as high as your total debt
• At least three years of personal credit history
• Active bank account — preferably a checking account
• US Citizen or permanent resident
• Minimum age 18

If you have less than $2,000 in debt, you can combine your credit card debt with other debt that you didn’t back with collateral — like unsecured personal loans. The one exception is student loans — student loan refinancing typically has more competitive rates and fees than your average debt consolidation loan.

How to get the most out of a debt consolidation loan

Use a debt consolidation loan to help manage your credit card debt. But taking a few extra steps to get your finances in order can set you on the path toward debt freedom.

• Sign up for automatic payments. This way, you can take advantage of the autopay discount on interest — usually around 0.25% — and avoid missing a payment. This goes for credit card payments as well.
• Pay more than minimum payments. If possible, pay more than the minimum payment required on a balance transfer card. The sooner you can pay down your debt, the better.
• Don’t cancel your credit cards as soon as you’ve paid them down. This negates any positive impact of debt consolidation on your credit utilization ratio.
• Save your credit card for expenses you can pay off in a month to avoid paying high interest rates again.
• Build an emergency fund by sending a portion of your paycheck to a high-interest savings account each month. This can help you avoid building up high-interest debt again — and needing another consolidation loan.
• Make a budget to help you avoid racking up credit card debt or missing your monthly payment. Even missing a single payment can affect your credit for seven years.

After paying down your debt, the goal is to avoid taking out another debt consolidation loan for credit card debt. Having multiple debt consolidation loans on your credit report looks bad on future credit card and loan applications.

Credit card debt consolidation is difficult with bad credit

Your chances of loan approval are higher with good credit. However, it’s possible to consolidate credit card debt with fair or bad credit scores below 670. Some online lenders consider additional factors like your income, education and career.

With online lenders, fair and bad credit borrowers can qualify for a lower interest rate than you’d otherwise find at a traditional lender. But options for bad credit are still slightly higher than average. If your credit score has decreased since you signed up for your credit cards, debt consolidation might not help you save on interest.