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- Consolidating credit card debt is taking out a loan to merge credit card payments into one payment.
- Through credit card consolidation, it may be possible to get a new loan with a lower interest rate.
- There are various options to consolidate credit card debt with unique pros and cons to consider.
If you're juggling credit card payments, it can feel tough to stay on track and get ahead. Through credit card debt consolidation, it's possible to simplify the repayment process and merge multiple payments into one, ideally with a better interest rate. You do this by taking out a new loan.
While credit card consolidation can be beneficial and may lower payments and the total amount of interest you owe, there are risks to consider. Below we cover the top six ways to consolidate credit card debt and the pros and cons to consider.
How to consolidate credit card debt
Choosing to consolidate debt isn't a choice to make lightly. You're essentially fighting debt with another loan, which can be risky. If done right, it may help but how you do it matters as well.
"Before considering any debt consolidation method, you need to work on paying down your debt." says Jay Zigmont, Ph.D., CFP® professional and founder of Live, Learn, Plan, a registered investment advisor based in Mississippi. "The first step is to lock all of your credit cards and stop taking out loans. It is very hard to get out of debt when you are taking out more at the same time."
Understanding the root cause of debt can help you make meaningful change and use the debt consolidation strategies below effectively.
1. Consolidate your debt with a personal loan
Understanding debt consolidation loans
Personal loans can be used for different things, but one common way to use them is to consolidate high-interest credit card debt. In general, personal loans tend to have more competitive interest rates. Using a personal loan, it's possible to pay off existing credit card debt and then pay the personal loan back with less interest.
"A personal loan might lower your interest rate and end up with just one bill to pay. Just make sure you do not use a personal loan to pay off your credit cards just to load them up again," suggests Zigmont.
Pros | Cons |
Typically have a fixed interest rate | May be difficult to get approved for a low rate if you don't have good credit |
Fixed monthly payments, which can be easier for budgeting | Lenders may tack on fees |
Most personal loans are unsecured, so don't require upfront collateral | Repayment term may be shorter, which could mean higher monthly payments |
How to qualify for a debt consolidation loan
Qualification requirements for debt consolidation loans vary by financial institution, and they may be more strict for larger loans. Most lenders will consider your credit score (the higher the score the more likely you'l qualify), your income and employment history, and the amount of debt you currently have relative to your income.
You can prequalify for a loan with multiple lenders before submitting a full application. Prequalifying won't hurt your credit score. Doing so will enable you to compare interest rates, terms, and fees from different lenders.
Choosing the right debt consolidation loan
When shopping for a debt consolidation loan, consider the interest rates, fees, loan terms, as well as the lender's reputation. Business Insider's roundup of the best debt consolidation loans is a good place to start.
Compare Personal Loan Rates
2. Transfer debt to a balance transfer credit card
If your credit is strong, you may be able to leverage one of the best balance transfer credit cardsas a tool to consolidate credit card debt. Balance transfer credit cards offer an introductory 0% balance transfer APR for a limited amount of time, and you can use that to your advantage by rolling over your balance from another credit card and save on interest.
But just keep in mind that this option is only helpful if you're able to pay off all or the majority of debt that you transfer over during the introductory offer timeframe. If not, the card's APR will revert to normal and would negate any savings you'd otherwise benefit from.
Ultimately, you're using a credit card to pay down credit card debt, which can be a slippery slope. So if your issue is with overspending with your credit cards, you could rack up a balance again or get deeper into debt.
"Many people play credit card roulette and move balance from one card to another," says Zigmont. "Keep in mind that even if it is a 0% interest offer, there may be a balance transfer fee each time you move it. You're not making progress if you are paying a transfer fee, and the promo interest offer goes away over time."
Pros | Cons |
May offer low or 0% balance transfer APR for the duration of the introductory period, which is typically six to 18 months | Interest rates can be high once introductory period is over |
Pay less in interest and therefore more toward the principal balance | Typically has a balance transfer fee, which can be 3% to 5% of the balance transferred |
Streamline monthly credit card payments | Must meet eligibility requirements and possess strong credit |
3. Tap into your home equity
When home values rise, it might be tempting to tap into home equity to consolidate credit card debt.
According to Freddie Mac, "Your home's equity is the difference between how much your home is worth and how much you owe on your mortgage." It's possible to take out a home equity loan to pay down high-interest credit card debt. This option may result in lower interest rates, but may also include closing costs that could add up. While this can be an attractive option — leveraging an asset you already have to pay down debt — it comes with considerable risk.
"It is a really bad idea to use your home to pay down your debts. You are putting your house at risk (secured debt) for credit cards (unsecured debt)," states Zigmont.
Pros | Cons |
May offer lower interest rates, which can save you money | Closing costs and other fees can add up fast |
May have longer repayment terms, which can mean smaller monthly payments | Failure to pay back the home equity loan can result in foreclosure on your home |
Allows you to leverage an existing asset | If the value of your home drops, it's possible to be underwater on the loan, which refers to owing more on the loan than the home is actually worth |
4. Take out a 401(k) loan
It's likely that retirement savings may be one of the largest assets you have, aside from your house. So if you're struggling with credit card debt, you may consider borrowing against your 401(k) to consolidate credit card debt.
In an ideal world, retirement savings shouldn't be touched. Though it's possible to use a 401(k) loan to your advantage, it comes with a high level of risk.
"I don't recommend 401(k) loans for two reasons. First, the individual is disconnecting the amount of the loan from a market investment that would likely earn a higher return over the long-term than 'paying yourself interest'," explains Stacy Mastrolia, CPA, MBA, Ph.D. and associate professor of accounting at Freeman College of Management at Bucknell University.
Aside from taking money out of the market, there can be major consequences to consider as well.
"If you leave your job before the loan is paid back, the entire amount is due fairly quickly. If the balance is not paid, the plan will deduct the loan from the distribution and the individual will be responsible for taxes and likely a 10% penalty on the loan amount," she explains.
Pros | Cons |
May have lower interest rates, which can save you money in the long run | Lose out investment gains and compound interest |
No application or credit score requirements to borrow your own money | May be subject to 10% penalty and taxes |
Can borrow up to $50,000 or up to 50% vested amount in 401(k) | If you leave your job, the 401(k) loan is due within a 60-day period |
5. Cash out auto refinance
Car values have been on the rise lately, which can make it an asset that you want to use to help pay off credit card debt.
Through a cash out auto refinance, you can get approved for a new loan that will cover what you owe and pay cash for the existing equity in your car, which can go toward paying down credit card debt.
It's a way to leverage an asset you already have to minimize your debt obligations. But if you fail to make payments you may be at risk of getting your vehicle repossessed.
Pros | Cons |
Leverage an existing asset to pay off high-interest credit card debt | Failure to make payments may result in your vehicle being repossessed |
May sometimes offer a lower interest rate | Depreciation could affect how much equity you have |
Lenders may offer more flexible or advantageous loan terms | There could origination fees and other costs associated with refinancing |
6. Sign up for a debt management plan
If your credit card debt feels impossible and you're considering bankruptcy, you might want to consider a debt management plan first.
A credit counseling agency may offer a debt management plan and work on your behalf to negotiate terms with your creditor and make payments toward your debt.
Here's the way it works: You make monthly payments to the credit counseling agency, and then these payments then go toward the debt on a set schedule. The process may take four years or more, but can be a way to navigate debt and have support — at a price.
"There are debt consolidation companies out there. They promise to negotiate your credit debt down. What they really do is take your money, charge you a fee, and then give it to the credit card companies," states Zigmont. "If you are 90+ days late, you can negotiate with collectors or credit card companies yourself, just as they can."
Pros | Cons |
May offer lower interest rates and fee waivers | May charge monthly fees |
Get budgeting and financial support through a credit counseling agency | May have a requirement that participants not use or add any additional credit |
Can create a structured plan to repay credit card debt | The debt management program may take years |
Credit card debt consolidation FAQs
Will a debt consolidation loan hurt my credit score?
Generally, you might hurt your credit score a bit when you consolidate your credit card debt. This is because lenders will perform a hard credit inquiry when they offer you a loan, and you'll close preexisting accounts. The negative impact is temporary, however.
Is there a fee to consolidate credit card debt?
Some lenders may charge fees to consolidate your credit card debt with a consolidation loan. The most common fee is an origination fee, which comes out of your overall loan proceeds and adds to the overall cost of your loan.
How does debt consolidation affect interest rates?
A debt consolidation loan can reduce your overall interest rate if you consolidate high-interest debts into a loan with a lower rate. However, the rate you'll pay depends on factors including your credit score, income, and other factors.
Is debt consolidation the same as debt settlement?
Debt consolidation and debt settlement are different. A debt consolidation loan rolls multiple debts into a single loan with a new interest rate and terms. Debt settlement is a deal that allows you to pay creditors a lump sum that's less than the full amount owed.
MelanieLockertis the founder of the blog and author of the book, "Dear Debt." Through her blog, she chronicled her journey out of $81,000 in student loan debt. Her work has appeared on Business Insider, Time, Huffington Post and more. She is also the co-founder of theLola Retreat, which helps bold women face their fears, own their dreams and figure out a plan to be in control of their finances.
Loans Reporter
Ryan Wangman was a reporter at Personal Finance Insider reporting on personal loans, student loans, student loan refinancing, debt consolidation, auto loans, RV loans, and boat loans. He is also a Certified Educator in Personal Finance (CEPF).In his past experience writing about personal finance, he has written about credit scores, financial literacy, and homeownership. He graduated from Northwestern University and has previously written for The Boston Globe.
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