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How to Consolidate Your Credit Card Debt

If you are feeling overwhelmed by the burden of debt from one or more credit cards, debt consolidation might be a great option.

To consolidate credit card debt, you replace the debt on one or more existing accounts with one new loan or credit card—ideally, at an interest rate that saves you money overall. The result should make paying off your debt easier.

Before you start the process, though, it's important to understand how debt consolidation works and what your options are.

How Debt Consolidation Works

Debt consolidation occurs when you use a new loan or credit card to pay off existing debt. While the term "consolidate" implies merging multiple credit accounts into one, you can also consolidate a balance from just one credit card.

Consolidating debt works best when you can score a lower interest rate on the new loan or credit card than what you're currently paying. With a lower rate, you can save money and potentially pay off your debt faster.

If you have multiple debt accounts you want to consolidate, the process can also simplify repayment by giving you just one monthly payment to keep track of. Also, if you have credit cards, which don't have set repayment terms, a personal loan's set repayment time frame could give you the structure you need to stick with the payoff plan.

For example, let's say you have a credit card with a $7,000 balance and a 20% annual percentage rate (APR). If you were to set a goal to pay off the debt over three years, you'd have a monthly payment of roughly $260, and you'd pay $2,365 in interest over that time.

But if you were to apply for a three-year personal loan with a 12% interest rate, your monthly payment would be $233, and you'd pay only $1,370 in interest—saving you $995.

However, debt consolidation isn't for everyone, so it's important to consider your situation and options before you apply for a new credit card or consolidation loan.

Should I Consolidate My Credit Card Debt?

If you're struggling with the burden of your credit card debt, here are a few things to consider to determine if consolidating your debt is a good fit for you.

Your Credit Score

The best debt consolidation tools typically require that you have good or excellent credit, which means having a FICO® Score of 670 or higher. If your credit isn't quite there yet, you may end up paying a higher interest rate on the new loan than what you're currently paying.

Check your FICO® Score to see where you stand. If it's too low and your debt situation isn't too dire, take steps to improve your credit score before you apply.

  • Get caught up on past-due payments and make every payment on time on time going forward.
  • Start paying down your credit card balances to reduce your credit utilization ratio.
  • Ask a family member with stellar credit to add you as an authorized user on one of their credit cards.
  • Check your credit reports for erroneous information that could be hurting your credit, and dispute information you believe to be incorrect with the credit reporting agencies.
  • Avoid applying for credit unless you actually need it.

If your credit is already considered good or better, you may be in a good position to qualify for an option that will help you reduce debt and save money.

Your Budget

With some consolidation options, you may end up with a higher monthly payment than what you're currently paying. For example, credit cards typically require a minimum monthly payment of around 1% to 4% of your balance. So, in our previous example with the $7,000 balance, your minimum would likely be lower than the $233 monthly payment on the personal loan option.

As you shop around for debt consolidation options, you may find ways to save on interest. But if you can't afford the new monthly payment, it can cause even more problems, including damage to your credit score. So check how much you'll need to pay with the new loan or card and make sure you can fit it into your budget before you apply.

Your Debt Load

Credit card consolidation is typically best suited for people whose debt is still relatively manageable. If you have so much debt that you can't even afford your current payments and consolidating wouldn't change that, you may need to consider more drastic options, such as bankruptcy.

Ways to Consolidate Credit Card Debt

There are several ways to consolidate your credit card debt, and each comes with its own issues and pros and cons you should consider:

  1. Use a balance transfer credit card
  2. Apply for a personal loan
  3. Tap your home equity
  4. Consider a debt management plan

Before you choose one of these options, consider all of the costs associated with each one, including upfront fees and potential long-term drawbacks.

1. Use a Balance Transfer Credit Card

If you have good credit or better, you may be able to qualify for a balance transfer credit card. These cards typically offer low or even 0% APR promotions, ranging from six to 18 months. You transfer your existing card balances to your new card, and then pay off the balance interest-free. After the 0% introductory period, though, the rate will jump to the card's regular APR, which can be high.

When you transfer a balance to your new credit card, you will likely also need to pay an upfront balance transfer fee. While some cards offer no-fee transfers, most charge between 3% and 5% of the transfer amount. Always calculate the amount of the balance transfer fee and make sure that your new interest rate still saves you money despite paying that fee.

Also, because credit cards don't have set repayment terms, have a plan in place to make sure you pay off the debt as quickly as possible. If you just pay the minimum every month, you'll likely still have a large balance when the regular APR kicks in.

2. Apply for a Personal Loan

Personal loans don't come with introductory 0% APR promotions, but they can provide fixed interest rates and a set repayment term, usually between three and five years. You can get a personal loan from a bank, credit union or online lender.

Start by visiting a credit union—they often offer the lowest rates (and federal credit unions can't charge more than 18%). Some online lenders may also offer low interest rates. Personal loan rates can range from less than 10% to upwards of 36%, depending on the lender and your credit situation, so it's crucial that you shop around. You may have to pay an origination fee for the loan, so be sure to ask about all the terms.

3. Tap Your Home Equity

If you own your house and have a considerable amount of equity, you may be able to use some of that equity to pay off existing debt. You can do this by applying for a home equity loan or home equity line of credit (HELOC), or by getting a cash-out refinance loan.

These loans can offer much lower interest rates than personal loans because they're secured by your home as collateral. However, closing costs can be expensive, and if you default on the debt, the lender could foreclose on your home.

Speak with a mortgage lender to find out what to expect with closing costs, and consult your budget to make sure you'd be able to afford the new monthly payments comfortably.

4. Consider a Debt Management Plan

If you're having trouble finding a balance transfer credit card, personal loan or home equity option at a favorable rate, consider contacting a nonprofit credit counseling agency that can help you set up a debt management plan.

A credit counselor can analyze your situation to help you find the right path. If you choose to get on a debt management plan, you'll make one monthly payment to the agency, and it'll pay your creditors on your behalf. Credit counselors can sometimes even negotiate lower interest rates, debt forgiveness or lower monthly payments for you.

You may have to pay a small service or monthly fee, and debt management plans typically last three to five years. Also, you may be required to close the credit accounts that you are consolidating, which could hurt your credit scores. Be sure to ask for all the terms, and keep these potential drawbacks in mind as you compare options.

To find a reputable credit counseling agency, make sure it is accredited by the National Foundation for Credit Counseling.

Look Into Strategies to Pay Off Credit Card Debt

One alternative to consolidating your credit card debt is to employ the debt snowball or debt avalanche method to more quickly pay down your balances.

With the debt snowball method, you target the card with the lowest balance and make extra payments toward that account, while paying just the minimum on all other cards. Once you've paid off that balance, move on to the next-lowest balance and add what you were paying on the first card to pay it off even faster—hence the "snowball" effect. You'll continue this practice until you've paid off all of your credit card balances.

The debt avalanche method works similarly to the debt snowball method. The only difference is that you'll focus on the cards with the highest interest rates first instead of the lowest balances.

The debt snowball method may be a better option if you're struggling to get motivated to pay off your debt. Paying off small balances quickly can give you small wins early, making it easier to build momentum. The debt avalanche method, on the other hand, can save you more money because you're getting rid of debts with higher interest first.

Depending on your debt situation, though, the difference in savings may not be large. Use a debt snowball calculator to determine which is the better option for you.

Above All Things, Focus on Your Goal

Debt consolidation can come in many forms, and some options may be better than others for your situation. The most important thing is that you make progress on eliminating your debt. The faster you can pay down your credit card balances, the sooner you'll have more cash flow to spend how you want.

As you work on consolidating and paying down your credit card debt, continue to check your credit score regularly to make sure your hard work is paying off.

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