Credit Card Debt Consolidation

    If you are struggling to keep up with multiple high-interest credit card payments, a debt management plan can consolidate your credit cards, lower your interest rate and give you the breathing room you need to pay off your debt.

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    What Is Credit Card Consolidation

    Credit card debt consolidation takes multiple bills from multiple card companies with multiple balances and multiple payment dates … and merges them into a single payment with a lot less stress.

    Done properly, credit card consolidation reduces the interest rate you pay on credit card debt, saves you money and simplifies your finances.

    There are three ways to consolidate credit card debt:

    1. Debt Management Plans – Offered by nonprofit credit counseling agencies, who work with creditors to lower interest rates and take one monthly payment from you and disburse the funds to your creditors each month.
    2. Credit Card Consolidation Loans – A DIY approach in which you borrow a large sum (hopefully at a lower interest rate) in order to pay off the balance on each credit card. This can be done with a personal loan, home equity loan, balance transfer credit card, or 401(k) loan, but the result is the same – one consolidated debt.
    3. Debt Settlement – You stop paying creditors. Instead, you make periodic payments to a debt settlement company in an attempt to build up a lump sum of money to offer each creditor and settle the debt.

    Consolidating Credit Card Debt in 10 Steps

    Credit cards being consolidated on table

    Each form has pros and cons attached to it, depending on your resources, your discipline level and your desire to eliminate credit card debt. For most consumers, the debt consolidation process is a 3-5 year program that should include a commitment to limited or no use of credit cards.

    Each one of the programs requires research. Like every project, it pays to do a little preparation work before diving in for a solution.

    Step 1: Calculate your monthly income and expenses.

    The starting point for consolidating debt is to do a detailed examination of your budget. List all your sources of income and all expenses in as fine a detail as you can. This will allow you to answer questions and compare numbers among the various credit card debt consolidation options.

    Step 2: Get a copy of your credit report.

    Federal law entitles you to one free credit report per year from Your credit report will list each of your creditors and the amount of money you owe them.

    After you have identified each creditor, log in to each individual account and write down the interest rate and minimum monthly payment of each. The information from your credit report, your budget and each account, allows you to answer the following questions:

    Step 3: What is your total amount of credit card debt?

    The amount of credit card debt is the first indicator of which credit card consolidation strategy is best for you.

    For example, if you have a small amount of debt, maybe only a couple thousand, then credit card refinancing with a zero-percent, balance-transfer credit card might be your best option. Larger amounts of credit card debt will require a more comprehensive strategy.

    Step 4: How much of your income can you budget toward debt?

    You should be left with a sum of money after totaling your monthly expenses (not including credit card payments) and subtracting your monthly income. If not, then you need to cut items from the expense side of your budget or find a way to make additional income.

    The money remaining after expenses will determine the monthly payment that you can afford. There is no use in accepting a loan with a $600 monthly payment if you only have $500 left in your budget after expenses.

    Step 5: What is your average interest rate?

    Because each interest rate is attached to a different credit card balance, what you are really looking for is the weighted average interest rate. You can find an online calculator or calculate this yourself.

    First, calculate the weight factor of each credit card by multiplying the interest rate by the balance.

    • Credit Card A: $10,000 x 20% = 2,000
    • Credit Card B: $4,000 x 15% = 600

    Next, add the weight factors together, and add the credit card balances together

    • Weight Factors: 2,000 + 600 = 2,600
    • Credit Card Balances: $10,000 + $4,000 = $14,000

    Then, divide the total weight factor by the total credit card balance and multiply by 100

    • Average Weighted Interest Rate: (2,600/14,000) x 100 = 18.571%

    Your average weighted interest rate is the number any consolidation loan needs to beat.

    Step 6: What is your credit score?

    Maybe the most consequential step of all: locate the credit score on your credit report.

    Your credit score is the best indicator of which credit card consolidation category is best suited for you. If your score is under 660, you’re going to have a hard time qualifying for a personal loan or balance transfer credit card.

    Credit scores are based largely on your credit utilization ratio, which is your credit limit versus how much you owe on each card. That means if your credit cards are maxed out, then chances are your credit score has taken a huge hit.

    Even if you do qualify for a credit card consolidation loan, the interest rates your given probably won’t compete with what you could get with a debt management plan.

    Step 7: Do I have assets to borrow from?

    The lowest interest rates go to loans using assets as collateral. That is because if you fail to make your payments, the lender can take your asset as payment.

    It’s risky to take an unsecured debt, like credit card debt, and turn it into secured debt, like a home equity loan or 401(k) loan. If you miss credit card payments, you’ll have to deal with late fees, higher interest rates and debt collectors.

    But at least you won’t lose your home or retirement fund.

    Step 8: Are my debts already in collections?

    If you haven’t made a payment on your credit card debt for over 180 days (six months), your account is in default, your credit score already has collapsed and most credit card consolidation options are off the table.

    In fact, in most cases, your account has been sold to a debt collector, which makes your problem even worse.

    Credit counselors who offer debt management plans, can only work with original creditors, not collection agencies. Being in default, means you likely won’t qualify for a loan from a bank, credit union or online lender.

    Your best bet is either debt settlement or bankruptcy, depending on your income and amount of debt.

    Debt collectors buy debts for nickels on the dollar, so if you are able to save up enough money there is a chance they will accept a lump sum-payment for a fraction of what you owe. This can be done through a debt settlement company or, you can simply call up the debt collectors and negotiate directly with them.

    Step 9: What is your debt-to-income ratio?

    If you have made it through steps 1-8 and nothing seems to be adding up, it’s time to take a look at your income in relation to your debt.

    It is highly unlikely that you will get approved for a loan with a debt-to-income ratio over 50%, even if your credit is pristine. It is also unlikely you will be able to save up enough money to settle your debt if your current income barely allows you to make ends meet.

    Bankruptcy is a last resort, but if you have an extremely high amount of credit card debt and a very low income, it could be your only option.

    Step 10: Pick a plan and follow through.

    Much of what was just covered can be achieved through a credit counseling session at a nonprofit financial agency. Their certified credit counselors walk you through this process, and use the information they gather to make a debt-relief recommendation.

    Whatever the recommendation, be sure to follow through with the plan. Debt is a slippery slope. There are landmarks along the way that should serve as wake-up calls like the first time you carried a balance on your card, or made only the minimum payment, or the first time you missed a payment, or were denied a new line of credit, or the first call from a collection agency.

    The further along you are, the fewer debt relief options you have. Find out which point you are at and choose one of these types of credit card consolidation.

    Types of Credit Card Consolidation

    As mentioned before, there are three ways to consolidate credit card debt, and each option is best suited for different scenarios.

    If you meet the eligibility requirements, debt management plans work best in most cases. Credit card consolidation loans work for individuals with good credit and solid income. If your debt has been sold to a collection agency, debt settlement might be your only choice.

    Debt Management

    Debt management programs (DMPs) are one of the lesser-known credit card debt consolidation options, but are the easiest one to qualify for and might be the most effective of any method.

    There is no loan involved so credit scores are not a qualifying factor. The nonprofit credit counseling agencies that administer DMPs, work with the card companies to reduce interest rates and come up with an affordable monthly payment, based on your income.

    Interest rates on your credit card debt typically drop to around 8%, sometimes even lower. The counseling agencies also try to eliminate or reduce late payment fees.

    Credit counseling agencies do look at your credit report to make an honest evaluation of your income and expenses. If they see that there is enough income to pay down the debt, they enroll you in a debt management program that usually takes three years to complete.

    If your situation doesn’t fit their parameters, they recommend one of the other credit card consolidation options as a solution.

    Credit Card Consolidation Loans

    The most popular choice to consolidate credit card debt is taking out a single loan to pay off all your credit card debt and then repay the new loan.

    Debt consolidation loans make sense, but only if you plan to stop using credit cards while you pay off the new loan you just took out. If not, you’ll have two problems, instead of one. The real question you must answer before choosing one of the below as a solution is whether it makes sense to create a new loan (debt consolidation) in order to satisfy an old loan (credit cards) that you couldn’t pay off to begin with?

    There are a few forms of credit card consolidation loans, any one of which should, at the very least, give you a better interest rate than what credit card companies charge.

    Personal Loans

    Banks make most of these loans, but experts advise an unsecured loan from a credit union might be the best place to find one with an acceptable interest rate. Credit unions can play with their lending requirements, especially if you’ve been a good customer. Online lenders can consolidate debt, too, but the rates may be too high for it to make sense.

    Zero-Percent Balance Transfers

    This is a safe option … if you qualify! This offer usually is available to the best customers, meaning people who make on-time payments and have a credit score of 670 or higher. You transfer your current card balance to the new card and pay zero-percent interest on it, usually for 12-18 months. There also could be balance transfer fees of 3%-5% of the amount transferred. And when the introductory zero-percent rate expires, you could be paying 20% or more on whatever balance is left on the card. This is a good option, but only if you are committed to paying down the debt by the time the introductory rate period ends.

    Home Equity Loans

    The fact that you are willing to put your home up as collateral assures that you will get a far lower interest rate on a home equity loan than what you’re paying the card companies. However, if you get behind on payments – and your payment history suggests that is a possibility – the lender could foreclose and you would lose your house. Big risk, big reward.

    Borrow From Retirement

    Borrowing from retirement is a terrible idea and absolutely a last resort option. Many 401(k) plans allow participants to borrow 50% of their retirement account balance or $50,000, whichever is less. If you are 59.5 years old or younger and don’t repay the money, you will have to claim it as part of income taxes, plus pay a 10% early withdrawal penalty. If you borrow, you must pay the money back within five years. If you leave the money in the retirement account, it is protected against creditors should they come after you. In other words, there is almost no reason to even consider this option, but it does exist.

    Debt Settlement

    If your credit card debt has grown beyond your ability to repay or if you just want to run from this problem as quickly as possible and don’t care about consequences, debt settlement might be your solution.

    Debt settlement companies offer creditors a percentage of what you owe – many claim they can cut it in half – and hope the lender will accept that amount as full payment. So, for example, if your credit card debt is $20,000, you (or a company you hire to do your bidding) could offer $10,000. If the card company accepts, you send them a lump-sum payment of $10,000 and the debt is settled.

    Who wouldn’t want to do that? Well, card companies for one and other lending institutions aren’t fond of it either. Those are just two of the reasons to look deep at this before choosing it.

    • The debt settlement process typically takes 2-3 years.
    • Debt settlement companies want you to send them any money you would be using for payments, rather than sending it to the creditors. This means that late fees and interest are added to your total every month.
    • Card companies don’t have any obligation to accept settlement offers and some won’t even deal with debt settlement companies.
    • If you use debt settlement, it goes on your credit report for seven years and could hurt your credit score by as much as 100 points.
    • Even if you get the amount owed reduced by 50%, by the time you pay the company’s fees and the late fees, your actual savings would be closer to 20%-25%.

    For some people, none of that matters. They’re happy to be out from under it.

    However, if you plan to get a car or home loan in the next seven years, this could be a problem.

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    Staff Writer

    Max Fay is an entrepreneurial Millennial whose thoughtful writing shows he has a keen eye on both. Max has a genetic predisposition to being tight with his money and free with financial advice. At 25, he not only knows what an “emergency fund” is, he already has one. He wrote high school and college sports for every major newspaper in Florida while working his way through Florida State University. That experience was motivation to find another way to succeed financially and he has at Max can be reached at


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    2. Douglass, M. (2016, October 3) Can You Guess How Many Credit Cards America Has? Retrieved from
    3. NA, (2017, September) Average Credit Card Debt in America: 2017 Facts & Figures. Retrieved from
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