Credit card consolidation loans

A credit card consolidation loan is any loan you use to pay off your credit cards. Since credit card interest rates can reach and exceed 30%, consolidating credit card debt is often a good idea. For example, debt consolidation loan interest rates were 20% for good-credit borrowers and as low as 12% for borrowers with excellent credit, according to Credible data from September 2023. Consolidating credit card debt has the added benefit of a single monthly payment, and it reduces your credit utilization, which can increase your credit score.

To get a credit card consolidation loan, you’ll generally need a:

• Reliable source of income that’s sufficient to make monthly payments
• Credit score and credit history that meets lender requirements
• Debt-to-income ratio (DTI) under 36%, but you may qualify with a higher DTI since you’re not taking on additional debt

Bad-credit and fair-credit borrowers may also qualify for a credit card consolidation loan, but they will likely qualify for higher rates. Securing the loan with a home or other collateral or finding a cosigner with good credit will help you qualify if you have bad credit, and potentially lower your rate.

Credit card consolidation loan rates may be impacted by:

• The current interest rate environment
• Your credit score
• Your income
• Your total debt
• Whether you have a cosigner
• Whether you have collateral
• The type of credit card consolidation loan you choose

Compare interest rates and terms for credit card consolidation between personal loans, home equity loans, and credit card balance transfer cards. Rates on personal loans are likely to be the highest, but you typically won’t put up collateral, like your home, for the loan. Promotional APRs for credit card balance transfer cards are often 0% but they only last up to two years, and these cards typically come with balance transfer fees.

Pros:

• Pay off multiple credit card balances
• Reduce interest rates
• Manage just one payment
• Can improve your credit score
• Fast funding on personal loans and credit card balance transfers

Cons:

• Can hurt your credit if you can’t make payments
• Hard to qualify for if you have bad credit
• May not be able to lower your rate if you have bad or fair credit
• Home equity loans can take a month or more to approve
• Promotional APRs on credit card balance transfer cards typically max out at two years

If you own a home with equity, have good credit, and are eligible for a 0% APR credit card balance transfer offer, you have multiple options for consolidating credit card debt. Consider how you feel about risking your home to pay off your credit cards, and be realistic about how long you need to make payments. If you can do it within the span of a balance transfer card’s promotional period, that may be your best option.

Otherwise, look to a home equity loan or a personal loan for multi-year repayment terms. Note that you could be approved for a personal loan the same day you apply, while it could take a month or more to get a home equity loan.

A credit card consolidation loan can improve your credit score in a few ways:

• Paying off credit cards can decrease credit utilization, which can quickly increase your score (note that this only works if you keep your credit cards open).
• Making timely payments can increase your credit score over time.
• If you’re taking out a type of debt you don’t currently have (like a personal loan), you can increase your credit mix, which can increase your credit score.

On the other hand, a credit card consolidation loan could hurt your score in these situations:

• You make late payments or fail to pay off the loan.
• When you first apply, you may see your score temporarily drop since the lender will conduct a hard credit inquiry.

If you have the option to consolidate credit cards at a lower interest rate, it’s often a good idea to do so. However, if you don’t have that option or aren’t sold on the idea, here are some alternatives:

• Borrow from friends or family to pay off credit cards.
• Borrow from your retirement plan.
• Borrow from a cash-value life insurance policy.
• Use a cash-out refinance auto loan.
• Continue to pay off credit cards at their current rates.

In many cases, yes, you can refinance a credit card consolidation loan. The type of loan you used to consolidate your credit card balances will determine how easy this process will be. For example, refinancing a personal loan is often straightforward and a good idea if your credit score or the interest rate environment has improved.

You may also be able to refinance a home equity loan, but the process will take longer, and you’ll need sufficient equity in your home to do so. If you transferred balances onto a credit card but can’t pay off the new balance within the promotional period, consider refinancing with a personal loan before the card adjusts to its standard APR.