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.
The average credit card debt for Americans is $3,380, according to Finder’s Consumer Confidence Index in 2022. And over a quarter of Americans say that they wouldn’t be able to manage their budget without a credit card, and nearly a quarter said that it’ll take at least one year to pay off their credit card debt.
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.
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.
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.
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.
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.
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.
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:
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.
There are several benefits to consolidating your credit card debt.
There are several ways consolidating your credit card debt can improve your credit:
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.
Typically, borrowers need to meet the following eligibility criteria to qualify for a debt consolidation loan:
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.
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.
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.
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 like Upstart accept low credit scores and consider additional factors like your 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.
Now is the time to review your finances and ensure you have a financial plan in place to get the most out of your savings and investments.
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Use this calculator to figure out how much you could save with a debt consolidation loan.
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