How To Consolidate Credit Card Debt

Credit card consolidation combines multiple balances into one, making it easier to manage with just one monthly payment and due date. Depending on your consolidation method, you could take advantage of a lower annual percentage rate, reducing your interest costs and helping you pay off the balance faster.

What Is a Credit Card Debt Consolidation Loan?

A credit card consolidation loan is a single loan used to pay off balances on multiple credit cards or other forms of consumer debt.

For example, if you owe $2,000 on three different credit cards, you can take out one $6,000 consolidation loan to pay them all off. This simplifies repayment, leaving you with one $6,000 loan to manage instead of three separate payments and due dates.

Credit card consolidation is a straightforward process.

1. Combine debts. Start by listing the debts you want to combine.
2. Select a consolidation method. Then, choose a plan and secure a loan to consolidate those debts into a single monthly payment, ideally with a lower APR.
3. Pay and manage one account. This approach leaves you with just one due date to manage.

Several strategies exist to consolidate credit card debt. While the following list isn’t exhaustive, it may offer some ideas you may not have considered.

Several methods exist to consolidate credit card debt, such as debt consolidation programs, personal loans and 0% intro APR offers from balance transfer credit cards.

Debt Consolidation Programs

A debt consolidation program combines your credit card balances into one payment. You make a single payment to the program, which then distributes it to your creditors. Unlike a debt consolidation loan, which directly pays off your debts, your original debts remain but become more manageable.

Ideally, the program lowers your monthly payment compared to paying each card individually. Debt consolidation programs may negotiate with your creditors to reduce interest rates and eliminate fees like late charges, though these outcomes aren’t guaranteed. Some programs may require you to close some or all of the cards you consolidate, so ask about this upfront if you want to keep any open.

For help with debt repayment and improving your credit, nonprofit organizations like the National Foundation for Credit Counseling offer free credit reports and scores and can assist in reviewing them with you. While these programs aim to create a workable payment plan, some charge setup or monthly fees, so consider this when selecting a provider.

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Personal Loans

A popular way to consolidate credit card debt is to apply for a personal loan through a bank, credit union or online lender. An application can often be completed online or over the phone.

One perk of personal loans is that they frequently offer a variety of term lengths (12 to 60 months) and are repaid through fixed monthly payments. This can help you as you budget, since you’ll have a consistent monthly payment.

Remember that the interest rate you’ll receive on a personal loan will depend on your loan term and credit score when you apply. Also, keep an eye on origination fees, which can increase the overall cost of your loan.

All in all, personal loans are a solid option but can be pricey if you receive an unfavorable interest rate or are dinged with origination fees. Always evaluate the interest rate offered against the interest rate of your credit cards to strive for the lowest possible APR when consolidating.

0% Intro APR Balance Transfer Offers on Credit Cards

Many credit cards offer a 0% intro APR on balance transfers for a limited time after account opening. While these cards may charge balance transfer fees (usually 3% to 5% of the amount transferred), they typically offer introductory periods of 12 to 21 months, allowing you to pay down the balance without worrying about accruing additional interest.

An example of a card with an introductory 0% APR offer is the Citi® Diamond Preferred® Card. This no annual fee card offers a 0% intro APR for 21 months on eligible balance transfers from date of first transfer and 0% intro APR for 12 months on purchases from date of account opening. After that, the variable APR will be 17.24% to 27.99%. Balance transfers must be completed within 4 months of account opening. A balance transfer fee of either $5 or 5% of the amount of each transfer, whichever is greater, applies.

Balance transfer credit cards come with some drawbacks, though. They may have a low credit limit, and your regular APR after the introductory period ends is likely higher than what you’d pay with a personal loan. You also typically need good to excellent credit (a score starting at 670 according to the FICO scoring model) to qualify for a 0% introductory APR card.

Second Mortgage or HELOC

If your home has gained value or has a low mortgage balance, you might consider using it to consolidate debt. Taking out a second mortgage or using a home equity line of credit allows you to use your home as collateral to pay off other debts.

These loans often offer lower interest rates than personal loans, resulting in reduced monthly payments, which may help you pay off the debt more quickly. However, be aware of potential additional mortgage expenses and tax implications, and check with your lender before proceeding.

401(k) Loan

We do not recommend withdrawing money from retirement savings unless you face an emergency. Using 401(k) funds reduces your retirement savings, and you’ll lose out on investment returns until that money is paid back. You could face significant taxes if you can’t repay the loan by the deadline, and the timeline may be shortened if you lose or change jobs.

While a 401(k) loan should not be your first choice for debt consolidation, it can offer some advantages. Since you’re essentially borrowing from yourself, the loan payments (and interest) go to your retirement account instead of a bank. Since it doesn’t require a credit check, it won’t impact your credit score or require a specific credit level, and paying off consumer debt with the loan may even boost your credit rating.

Peer-to-Peer Lending

Peer-to-peer lending is another option for consolidating debt. It connects borrowers who want to combine their debts into one manageable monthly payment with investors seeking a steady return on their investment. This could create a “win-win” situation for both sides, but prospective borrowers should carefully compare the rates and fees of P2P loans with those offered by more traditional lenders.

Auto Equity Loan

If your vehicle is paid off or has a low balance compared to its value, using it as collateral for a loan can help you pay off other debts. This option typically allows you to receive a lower rate than an unsecured personal loan.

However, the loan amount is limited to the vehicle’s value, and you’ll be at risk of having your vehicle repossessed if you can’t repay it. Still, this method allows you to leverage an asset to secure a lower loan rate.

If you are struggling to manage multiple high-interest credit card debts, credit card debt consolidation can be a pathway toward ease of mind. Not only can rolling your debts into an option with a lower interest save you money, but it can also simplify your credit management, requiring you only to handle one set payment each month. If this structure sounds appealing, consolidating your credit card debt may be a good idea.

Credit cards and their rewards can be tempting as you aim to earn cash back or points for your next trip. However, credit card debt is common and can result in costly interest charges. If managing multiple card balances feels overwhelming and financially draining, exploring credit card debt consolidation could be a smart first step toward regaining control of your finances.