If you don’t have a money tree or a magic wand that wipes out credit debt, you can still get out of debt with credit card debt consolidation. The strategy involves combining your credit card debts into one convenient monthly payment using a loan or balance transfer, which can also help you snag a lower interest rate.
When choosing a debt consolidation method, it’s important to consider your credit score and your personal financial situation. Learn about debt consolidation options so you can find the best way to consolidate credit card debt for your needs.
1. Credit card balance transfer
Some credit card issuers offer low- or no-interest promotional periods for balance transfers. You may need to get a new card, or an existing card issuer could make such an offer available. Promotional periods may last up to 21 months — during this time, you’ll only be charged the promotional interest rate on any balances you transfer (which could be 0%). But you’ll typically pay a balance transfer fee, which is calculated as a percentage of the balance you transfer, and could be up to 5%. Once you transfer your other credit card balances, you’ll only have one monthly payment to worry about.
However, you’ll want room in your budget to pay off the entire balance before the introductory period is up. If you’re more than 60 days late on a monthly payment, or if you carry a balance past the promotional period, you could get stuck with a high interest rate. If you need more than 21 months to pay off your debt (or the length of the promotional period available to you), you may be better off taking out a personal loan, especially if you qualify for the best rates.
2. Personal loan
A personal loan allows you to borrow a lump sum of money, typically without providing any collateral, and repay it in monthly installments over a period of time. These loans can be used for almost any purpose, including debt consolidation. If you use the money from the loan to pay off your credit card bills, you’ll only have a single personal loan payment to keep track of.
It’s a good idea to compare personal loan rates by prequalifying for a personal loan with several lenders prior to accepting a loan offer. Ideally, the APR should be less than your current APR on your credit cards. If it’s not, you won’t save money by consolidating your credit card debt with a personal loan, even if your monthly payment is lower.
Tip: Compare APRs to see how much it costs to borrow money — the APR accounts for both the interest rate and fees to take out the loan.
However, if you need more time to pay off crushing credit card debt, it could be worth considering a lower monthly payment that you can handle (over a long repayment period), even if you end up paying more in interest over the term of the loan.
Learn More: APR vs. Interest Rate on a Personal Loan
3. Debt management plan
Debt management plans (DMPs) are programs administered by nonprofit credit counseling agencies to help people get out of debt. These programs aren’t loans and won’t have a lasting negative effect on your credit score. They’ll combine your debts into one monthly payment that you’ll repay over a period of three to five years. Nonprofit credit counseling agencies typically negotiate with your credit card issuers to lower your interest rate and waive fees, so you can get out of debt with a lower monthly payment.
Each month, you’ll send an agreed-upon, lump sum payment to the agency, which will distribute the payments to your creditors on your behalf. Another benefit of this debt consolidation method is that nonprofit credit counseling agencies typically provide guidance and education that can help you stay out of debt in the future. Make sure you work with a nonprofit credit counseling agency that’s approved by the U.S. Department of Justice. The Financial Counseling Association of America and the National Foundation for Credit Counseling are both excellent options.
4. Home equity loan or HELOC
Home equity loans and home equity lines of credit (HELOCs) are both ways to borrow against the equity you’ve built in your home. You receive a home equity loan as a lump sum, while a HELOC is a revolving credit line that you can borrow from as needed, much like a credit card. Because these loan types are secured by your home, they tend to come with lower interest rates. But if you fail to make the payments, you could lose your home in foreclosure.
Home equity loans and HELOCs also have closing costs, just like a mortgage — which increases their overall cost. Therefore, they’re best if you have a lot of credit card debt. HELOCs typically come with variable interest rates, but can be helpful for homeowners who may need to borrow again in the future for other reasons or those who can’t afford to repay the principal right away — that’s because HELOCs have a draw period and a repayment period. You could have 10 years, for example, before you need to repay principal and interest, depending on the lender.