6 Ways To Consolidate Credit Card Debt

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. 

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.

5. Cash-value life insurance

If you have a permanent life insurance policy that builds cash value, such as a whole life, universal life, or variable universal life policy, you may be able to borrow against the accrued cash value at a low interest rate and use the money to consolidate your debt. You’ll need to repay any loans against your life insurance policy with interest if you want to maintain your death benefit. If you die before you’ve repaid the loan, the balance will be deducted from the death benefit provided to your beneficiaries. 

The benefit of debt consolidation with a life insurance policy loan is that you don’t need to worry about a credit check or other requirements, and you can repay the loan at your own pace. Just don’t let the balance get higher than your cash value, and stay up to date with your premiums so your policy doesn’t lapse. Also, be aware that if you have a new life insurance policy, this option may not be available to you. Cash value grows slowly at first, and it may take several years to accrue enough to borrow against.

6. Cash-out auto refinance

Cash-out auto refinancing replaces your current auto loan with a new auto loan that’s larger than your outstanding balance, allowing you to keep the difference in cash. This is generally only a good idea if you can get a comparable or lower interest rate on the new loan or if you don’t have an auto loan — it’s not wise to accept a loan with a higher interest rate than your current auto loan.  

It also only works if you have enough equity in your vehicle. For example, if you have $15,000 worth of equity in your vehicle and still owe $5,000 on your car loan, refinancing could get you a new $20,000 loan and a lump sum of up to $15,000. 

A cash-out auto refinance loan is secured by your vehicle, so your car could be repossessed if you default on your payments. There’s also the risk of owing more on your loan than your car is worth, given that cars typically depreciate over time. Current auto loan rates are higher than they’ve been since 2006, according to the Federal Reserve, so now may not be the best time to consider this option. 

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How to choose the right consolidation method

Before you choose a method and take steps to consolidate debt, ask yourself the following questions:

• How much debt do I have? Some loan types offer higher borrowing limits than others, and those that have high closing costs or upfront fees may only be worth the lower rate if you’re borrowing a large amount. 
• What is my credit score? Some debt consolidation options are better for people with poor or fair credit than others. For example, a life insurance policy loan won’t require a credit check at all. On the other hand, if you have excellent credit, you may be able to get a low-interest personal loan or a great balance transfer offer. 
• What monthly payment can I afford? Look at your budget and determine the maximum you can comfortably put toward debt repayment each month. Choose a debt consolidation option with a term that allows you to pay that amount or less each month. 
• Do I need help? If you’re confused about your options or need help staying out of debt in the future, seek advice from a nonprofit credit counseling agency first. 

FAQ

What is the best way to consolidate credit card debt?

The best way to consolidate credit card debt depends on factors like your budget and your credit score. Consider which options you’re eligible for, which offer monthly payments you can afford, and which will save you the most money. One popular way to consolidate credit card debt is with a personal loan. 

What happens when you consolidate credit card debt?

When you consolidate credit card debt, you’ll be left with one monthly payment on a loan or balance transfer credit card. You’ll need to keep up with regular monthly payments until your debt is paid off. While you may notice a slight initial dip in your credit score, you’ll see improvement over time as you pay down debt. 

How to consolidate credit card debt without hurting your credit

There are a few ways to consolidate credit card debt without hurting your credit. Though a debt consolidation loan, balance transfer card, or DMP may have a slight negative impact on your credit initially, it can improve your credit in the long run. A life insurance policy loan will have no direct impact on your credit, bad or good. No matter the method you choose, paying down debt will have a positive impact on your financial situation.

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