5 Ways to Consolidate Credit Card Debt

Quick Answer

Consolidating credit card debt can be a great way to save money through a lower-interest loan or credit card promotion. Balance transfers, personal loans, home equity loans, 401(k) withdrawals and debt management plans are all viable ways to pay off your debt.

A women is typing on her laptop that is surrounded by documents as she holds her credit card in her had at the kitchen table.

If you're worried your credit card debt is getting out of hand, now is a good time to develop a strategy to pay it down quickly. Debt consolidation is one of the many options you can pursue, and if your credit history is in good shape, it can potentially help you save money on interest.

Common ways to consolidate credit card debt include using balance transfer credit cards, personal loans and home equity products. Here's what you need to know about each, along with some other paths you can take.

1. Use a Balance Transfer Credit Card

A balance transfer credit card is a type of credit card that offers an introductory 0% annual percentage rate (APR) promotion when you bring your balance from another card. Depending on the balance transfer card, you can get up to 21 months of no interest, which could save you hundreds or even thousands of dollars.

What's more, since you're not paying interest, more of your money is going toward your principal balance every month, making it easier to pay down your debt fast.

Using a balance transfer credit card is best for people who have good credit or better—that's a FICO® Score of 670 or higher. It's also better if you don't have a lot of credit card debt because the amount you can transfer will depend on your new card's credit limit.

Pros

  • An introductory 0% APR promotion can save you time and money.
  • Some cards also offer rewards and a 0% APR on new purchases.
  • Most balance transfer cards don't charge an annual fee.

Cons

  • You may not get a high enough credit limit to transfer all your credit card debt to the new card.
  • Balance transfer credit cards typically charge an upfront fee of 3% to 5% on each transfer.
  • Adding another credit card to the mix could exacerbate spending problems.

2. Take Out a Personal Loan

Personal loans don't come with an introductory 0% APR, but they can offer a structured repayment plan, which isn't an option with most credit cards. If your credit is in good shape, you may even be able to score a lower interest rate on a personal loan than what you have on your credit cards.

That doesn't mean you need stellar credit to get approved: There are personal loans available to consumers across the credit spectrum. But you generally need good credit or better to secure a low enough interest rate to make it worth your while.

A personal loan could be worth considering if you can't get approved for a balance transfer credit card or if the risk of overspending would be too high if you add another card to your wallet. You may also want a personal loan if you've been caught in the minimum credit card payment trap in the past and want a structured repayment plan.

Pros

  • A personal loan offers more repayment structure than credit cards.
  • It may come with a lower interest rate.
  • You pay off your credit card debt sooner.

Cons

  • You're not guaranteed to get a lower interest rate.
  • Some personal loans come with an upfront origination fee, which can range from 1% to 8% of the loan amount.
  • There's no interest-free promotion.

3. Tap Into Home Equity

If you own your home, you may be able to use a home equity loan or home equity line of credit (HELOC) to consolidate your credit card debt. This option may be possible even if you have fair credit, which starts at a FICO® Score of 580.

Home equity products are secured by your home, so there's less risk for the lender, and you can likely qualify for a much lower interest rate than what a personal loan could offer. However, using your home as collateral increases your risk, since you could lose your home if you miss too many payments. Lenders also limit how much of your equity you can borrow. Some may only allow you to have a combined loan-to-value ratio of up to 80% between your primary mortgage and home equity loan or HELOC. You may also face upfront and ongoing fees, depending on which option you choose.

Pros

  • Interest rates are typically low because the loan is secured by your home.
  • Repayment terms are usually lengthy, which could make for a more affordable monthly payment.
  • HELOCs may charge interest only during the initial draw period (usually 10 years).

Cons

  • The lender can foreclose on your home if you fail to repay the loan.
  • Home equity loans and HELOCs may charge closing costs of up to 5% of the loan amount. Some HELOCs may also charge annual fees.
  • If the value of your home drops, you could end up owing more on it than it's worth.

4. Withdraw From Your 401(k)

If your credit is in poor shape and you either don't own a home or you don't have much equity in your house, you may look to other assets, such as your retirement plan.

It's possible to take money from your 401(k) plan as a withdrawal or a loan and use it to pay down credit card debt. However, things can get complicated and costly if you're not careful.

If your plan provider offers 401(k) loans and you take one out, the interest you pay goes to your account and there's no tax penalty, so it's a better option than an early withdrawal. That's because you'll pay a 10% penalty on an early 401(k) withdrawal and owe taxes on the amount you withdraw. But if you have a 401(k) loan and leave your job for any reason, the loan may become due immediately, and if you can't pay, it'll be treated as an early withdrawal.

Pros

  • It doesn't require a credit check.
  • Loans charge lower interest rates than credit cards.
  • Interest paid on a 401(k) loan goes into your account.

Cons

  • Borrowing or withdrawing from your 401(k) could derail your progress toward retirement.
  • Early withdrawals from a 401(k) can end up being costlier than credit card interest.
  • Leaving your job or getting laid off could make things much worse.

5. Consider a Debt Management Plan

A debt management plan is a structured repayment plan offered by credit counseling agencies. This path may be worth it if you have a large amount of credit card debt and your credit isn't in good enough shape to pursue other consolidation options.

With a debt management plan, the credit counseling agency contacts your credit card companies and may negotiate lower interest rates and monthly payments. Then, you'll make one monthly payment to the agency, which will distribute payment to your various creditors.

Debt management plans typically last three to five years and may come with modest upfront and ongoing fees.

Pros

  • You may be able to save money on interest.
  • You'll only have one monthly payment.
  • It doesn't require a good credit history.

Cons

  • You'll be required to close your credit card accounts, so you can't continue to use them.
  • You need to make your payments on time to keep the plan.
  • Some credit card companies may refuse to participate.

How Credit Card Debt Consolidation Affects Your Credit Score

Consolidating credit card debt can affect your credit score negatively in the beginning, but may have an overall positive effect in the long term. If you take out a new loan or credit card, for instance, the lender's hard inquiry into your credit can knock a few points off your credit score temporarily, and the new credit account itself will affect your average age of accounts.

Using a balance transfer credit card has a higher likelihood of damaging your credit than other options, at least temporarily. This is because transferring a large amount of debt that uses most or all of the new card's available credit could result in a higher credit utilization rate and a lower score. But as you pay down the debt, you'll see your credit score rebound.

In all cases, any negative impact on your credit score is typically temporary, as long as you pay your bills on time and avoid adding more debt to the equation, which could put a strain on your budget and make it harder for you to keep up.

Should I Consolidate My Credit Card Debt?

If you're struggling with significant credit card debt, there are a few things to consider to determine if consolidating your debt is a good fit for you. For starters, the best debt consolidation tools typically require that you have good or excellent credit. Even if you have decent credit, it might not be enough to secure a low interest rate.

You'll also want to consider your budget and whether the consolidation option you're considering is affordable for you. Finally, if your case is extreme and you have so much debt that you can't even afford your current payments, you may need to consider more drastic options, such as bankruptcy. The important thing is to find a strategy that works best for you.

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 pay down your balances faster.

Debt Snowball

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.

Debt Avalanche

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.

Above All, 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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