7 Ways to Consolidate Credit Card Debt

If high-interest credit card debt is causing you financial problems, consider credit card consolidation as a solution. The right consolidation program will reduce the interest rate on your credit card debt and give you the breathing room you need to pay off those cards.

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Home > Debt Consolidation > 7 Ways to Consolidate Credit Card Debt

If you’re having difficulty managing credit card debt, you may want to consider consolidation. The main benefits of credit card consolidation are reduced interest rates and fewer accounts to manage. There are several ways to consolidate credit card debt, and each one has pros and cons.

What Is Credit Card Consolidation?

Credit card debt consolidation is the act of using a new loan, a new credit card, or a debt management program, to consolidate multiple credit card accounts into one.

If you want to use a loan or a credit card to consolidate your debt, you’ll have to open a new account, and then use it to pay off your old accounts.

Alternatively, you could use debt management, a consolidation program which involves making a monthly payment to a third-party agency that manages your credit accounts on your behalf.

Ideally, credit card debt consolidation should save you money by getting you a lower interest rate than your current accounts. In some cases, consolidation can also reduce your monthly expenses and help you balance your budget by reducing the minimum amount you have to pay to creditors each billing cycle.

There are seven ways to consolidate credit card debt:

  1. Debt Management Plans
  2. Credit Card Consolidation Loans
  3. Zero-Percent Balance Transfers
  4. Home Equity Loans
  5. Cash-Out Refinancing
  6. Borrow from Retirement
  7. Debt Settlement

Before You Start Consolidating Credit Card Debt

Before you look into debt consolidation, it’s important to determine your end-goal. Are you hoping to reduce your interest rates? Do you want to reduce your monthly expenses? Is your goal to pay off debt faster?

Each option for consolidating can give you a unique set of benefits, so it’s important to be clear on your goal before applying for a new loan, credit card or debt management program. Plus, each option will have unique rates and fees, so you’ll want to make sure the charges don’t negate the benefits you get.

Here are some items you can review to find out if debt consolidation is a good idea:

Assess Your Finances and Debts

Take a quick inventory of your credit card debt. This will help you understand the full picture of what you owe and determine whether or not a particular consolidation option is worth pursuing.

For each of your credit cards, gather the following information:

  • Minimum monthly payment
  • APR (this figure includes both your interest rate and all fees)
  • Your current balance

Once you find that info, use it to calculate how much you pay toward all of your credit card debt each month, and your total balance owed on all of the accounts. Not sure where to find the info? You can locate it on your credit card statements or by reviewing your credit reports.

If your debt is fairly minimal — a couple thousand dollars or less — a zero-percent balance-transfer card might be a good option for saving money and paying off debt faster. That’s if you qualify for the balance transfer card. You likely need a credit score of 680 or higher to get one.

If you owe a larger amount, especially if the debt seems difficult or even impossible to pay off, your situation may warrant a debt management plan.

Credit Score

The better your credit scores, the more consolidation options you’ll have. That’s because higher scores help you get approved for more credit cards and loans, with better rates.

Not sure what your scores are? Many credit card companies now offer their customers complimentary access to one version of their credit score. You may also be able to see a version of your score through a free credit monitoring service.

Just be aware that you may see different scores depending on the source you use. Instead of focusing on the exact number, try to focus on the range your credit score falls into. If your scores are not “good” — meaning they’re lower than 650 — you may want to work on improving your credit before applying for a new loan or credit card, or start by looking into a debt management program.

How to Consolidate Credit Card Debt in 7 Methods

There are a handful of ways to consolidate credit card debt, and each one has unique benefits and drawbacks. Before applying for any new account or program, be sure to review the requirements and make sure you understand all associated fees.

Debt Management Programs

Debt Management Programs are one of the few consolidation options that don’t involve taking out a loan or new credit card. Instead, you’ll work with a nonprofit credit counseling agency to see if you can set up a new, more desirable arrangement with your creditors.

In order to enroll, the credit counseling agency will review your financial situation. This can include reviewing your income and expenses to determine what kind of assistance you need, and offering you professional advice or resources to help improve your situation.

Then, if you enroll in a debt management program, the credit counseling agency will work with your credit card companies to help you get special concessions, such as interest rate reduced to around 8%, more affordable monthly payments, or even forgiveness of certain fees.

Here are the main benefits of going on a DMP:

  • Save money by getting interest rates reduced to around 8%
  • Make one monthly payment to the credit counseling agency instead of managing multiple accounts.
  • Pay off debt faster
  • Reduce your total monthly debt payment and balance your budget
  • Improve your credit scores as you pay down your debt balances

One drawback is that you may have to close all of your credit card accounts while on the debt management plan and closing accounts can cause your credit scores to drop in the short-term. But keep in mind that you’ll be debt-free when you complete the program, and your scores should see a major improvement after making on-time payments for 8-10 months.

Credit Card Consolidation Loans

Consolidation loans are a popular option for people with credit card debt. In fact, a study published in 2020 found that debt consolidation was the most common reason people apply for personal loans.

One reason debt consolidation loans are a popular choice is because, at minimum, they can reduce the number of accounts you’re dealing with, which makes it easier to stay on top of payments.

With this option, you’ll take out a new personal loan and use it to pay off your credit card debt. Ideally, your new loan should result in lower interest fees than you currently pay, especially if your credit scores have improved since you took on your credit cards, or if interest rates are low due to market conditions.

If you don’t get a lower interest rate when you consolidate, then it’s not worth the effort, since all you’ll really be doing is moving your debt around. Plus, your credit scores will drop by a few points each time you apply for a new loan.

One way to find the best consolidation loan, without damaging your credit, is to shop around and compare preapproval quotes from multiple lenders over a two-week period.

Zero-Percent Balance Transfers

A zero-percent balance transfer can be a great option… for those who qualify.

With this option, you’ll take out a new credit card that has a zero-percent interest rate during an introductory period — usually the first 12 to 18 months — then you’ll use it to pay off your other credit cards. In other words, you’ll transfer your debt to a new card.

Zero-percent balance transfers can make debt payoff faster and more affordable, since every dollar you pay will go toward reducing your balance during the introductory period. But they’re general only available to people with great credit: meaning those who have credit scores of 670 or higher.

The downside of going this route is that you’ll likely be charged a balance transfer fee of 3%-5% of the total amount you transfer. So, if you transferred $7,000, you’d likely pay a fee of $210 to $350. Plus, you may be charged an annual fee and you’ll pay interest on any balance that’s remaining after the 0% introductory period ends.

Home and Car Equity Loans

A far riskier strategy for paying off credit cards involves using your home equity or vehicle equity to pay off your debt.

Home equity loans and car equity loans can be an option for someone who has equity in their home or car— meaning the property value is higher than the balance you owe. With this option, you would need to take out a new loan for an amount less than or equal to your property’s equity. Then you’d use the money to pay off credit card debt.

Equity loans generally have far lower interest rates than credit cards, but you’ll have to use your property as collateral, which can be risky for a few reasons:

  • If you fall behind on loan payments you could face vehicle repossession or home foreclosure.
  • When you borrow against your equity, you’ll be adding new debt, interest charges and fees to an asset you already paid money for.

Cash-Out Refinancing

Another way you can use your assets to pay off debt is through a cash-out refinance, which is similar to a home equity loan in that you’ll borrow money against your home. However, with this option, you’ll take out enough money to pay off the balance of your current mortgage, plus you’ll borrow extra cash to pay off your credit card debt.

In other words, you’ll add your credit card debt to the balance you owe on your home loan. This option can make it cheaper to pay off credit card debt since interest rates on home loans are generally far lower than credit cards.

The downside is that you’ll likely have to pay closing costs, which are usually between 2% and 6% of the total loan amount. Plus, you’ll risk losing your collateral (your home) if you fall behind on payments.

Borrow from Retirement

Borrowing from a retirement plan should always be one of the last options you consider, since it can be incredibly costly.

When you go this route, you’ll take out a loan from your retirement savings and use it to pay off debt. A retirement loan might seem like a simple solution for overwhelming credit card debt, since you don’t have to qualify for the loan, but these there are significant drawbacks you could face, including:

  • Early withdrawal fees
  • Tax penalties
  • Loss of earning power of your retirement savings

Ultimately, you’ll pay a lot of money to borrow your own money, and you’ll have less cash available to you when you retire.

Debt Settlement

Debt settlement may look like a solution from the outside, but it’s almost never a good idea. That’s because debt settlement companies often make misleading claims, they charge money for tasks you could complete yourself, they can destroy your credit, and they can get you into further financial trouble and even legal trouble.

Debt settlement companies work by collecting a monthly payment from you. But they do not send the money to your creditors. Instead, they wait for your accounts to go into default, and eventually offer your creditors a settlement, for just a percentage of what you owe.

Here’s what you need to know before considering debt settlement:

  • The process typically takes 2-3 years.
  • You incur late fees and interest every month the settlement company fails to pay your debt.
  • You may still get calls and letters from your creditors.
  • Credit card companies don’t have an obligation to accept settlement offers, and some won’t work with debt settlement companies at all.
  • Each credit card payment you miss during the debt settlement process will stay on your credit report for a minimum of seven years, but just one missed payment could drop your scores by 100 points or more.
  • Once your creditor realizes you intend to settle, they may sell your account to a debt collector or even fast-track it for legal action, which could eventually result in a wage garnishment against you.

Regardless of their promises, debt settlement companies are not likely to offer you any benefit,  and the risks far outweigh any reward.

Alternatives to Credit Card Debt Consolidation

There are ways to eliminate your credit card debt – some manageable, one very drastic – without going through debt consolidation.

The manageable method would be to use the “debt snowball” or “debt avalanche” method, both of which have track records of success for disciplined consumers committed to paying off credit cards.

In debt snowball, you make the minimum payment on all but the card with the lowest balance. For that card, you pay as much as you have available and pay it off quickly. When that’s done, you take the money you were spending there, and apply it – plus the minimum – to the card with the next lowest balance, while continuing to pay the minimum on other cards. The theory here is that you quickly knock out your low balance cards and that gives you momentum when you go to work on the high balance cards.

The avalanche method is similar in that you make minimum payments on all but one card, only you focus on the one with the highest interest rates. When you pay that off, you move to the card with the next highest interest rate and continue along until all cards are paid off.

The drastic step is filing bankruptcy. If you don’t have enough income to pay down credit cards gradually – and you’re still using cards to accommodate your lifestyle – the amount you owe may get too high to deal with.

If you can’t come up with a plan that pays it all off in less than five years, bankruptcy might be your best option. A successful filing will eliminate all unsecured debt and give you a chance to start over and regain control of your finances.

Bottom Line

If you’re struggling to manage credit card debt, you have plenty of options to consider. But you never want to choose a solution that will make your situation worse down the line.

If you can’t qualify for a new credit card or loan, or if you need help managing a large amount of debt, consider a debt management program. Even if you don’t end up going on a plan, a credit counseling agency can help you review all of your options and choose what’s best for you.

If you’re considering a new loan or credit card to help you consolidate your debt, find a trusted creditor, such as your credit union or bank. And make sure that you’re getting what you really need out of the deal, whether that’s lower interest rates or a reduction in your monthly payment.

About The Author

Max Fay

Max Fay has been writing about personal finance for Debt.org for the past five years. His expertise is in student loans, credit cards and mortgages. Max inherited a genetic predisposition to being tight with his money and free with financial advice. He was published in every major newspaper in Florida while working his way through Florida State University. He can be reached at [email protected].


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