How 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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What Is Credit Card Consolidation?

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

Done properly, credit card debt consolidation reduces the interest rate you pay on credit card debt, saves you money each month, simplifies your finances and over the long term, gives you peace of mind.

Sounds good, right? Let’s check out the methods.

There are three ways to consolidate credit card debt:

  1. Debt Management Plans – offered by nonprofit credit counseling agencies that work with creditors to lower interest rates. Participants make a single monthly payment to the agency, which disburses the funds among their creditors.
  2. Credit Card Consolidation Loans – provide a do-it-yourself approach in which the consumer borrows a sum (ideally at a lower interest rate) large enough to pay off the balance on each card. This can be achieved with a personal loan, home equity loan, cash-out mortgage refinancing, balance transfer card, or retirement-fund loan. The result is the same: one consolidated debt.
  3. Debt Settlement – involves cutting off payments to creditors but, instead, making periodic payments to a third party — a debt settlement company — in an attempt to build up a lump sum of money to offer each creditor in exchange for settling the debt in full.

Credit cards being consolidated on table

How to Start Consolidating Credit Card Debt

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.

Assess Your Finances

The best way to get where you’re going is to know your starting point. With credit card debt consolidation, begin with a detailed examination of your budget. List all sources of income and all expenses down to the penny. As part of this exercise, consider keeping a financial diary (there are several free apps for this) for a month or two so no expenditure slips through the cracks.

Knowing the truth of your financial situation will allow you to answer key questions and compare numbers to make the best choice among the assorted credit card debt consolidation options.

Credit Score

The better your credit score, the better your chances of securing a good deal on your credit card debt consolidation plan. Don’t know your score? Federal law entitles you to one free credit report annually from each of the Big Three credit-monitoring agencies: Experian, TransAmerica, and Equifax.

Ask for all three at once (they apply slightly different weights to their metrics, so your results may vary), or, because those weights aren’t all that different, stagger your requests at four-month intervals; that way you’re never far from getting a fresh, representative handle on your credit score.

Your credit report lists each of your creditors and the amount you owe them. Check — no, scrutinize — your report for errors. Misreported information is not uncommon, and those mistakes rarely accrue to your benefit. Refer to the agency’s website for guidelines on reporting errors.

After you have identified each creditor, log in to each individual account and jot down the interest rate and minimum monthly payment for each. Equipped with your credit report, your finely tuned budget, and the (accurate) nitty-gritty from each credit card account, you’re ready to take informed action.

Debt

Now it’s time to crunch some numbers. First, calculate your total credit card debt. Add ’em all up. Before you can dig out, you must know how large a hole you’re in.

Having a reliable fix on your total credit card debt will give you an idea where to start. For example, if your debt is fairly small — maybe only a couple thousand — credit card refinancing with a zero-percent balance-transfer card might be an appealing option. (Be alert for the interest rate bump that kicks in after the introductory rate expires; you want your balance to have reached zero before then.)

A larger amount of total credit card debt will likely involve a more comprehensive strategy. Here again, budgeting is essential.

Total your monthly after-tax deductions. Make it an honest number. Now, total your monthly expenses (excluding credit card payments) and subtract this number from your monthly income. There should be — knock on wood — a certain amount of money left over.

If you’re in the red even without credit card payments, you have a couple of choices: Cut your expenses, or find a way to boost your income.

Grab the low-hanging fruit. Pack a lunch for work. Bottle your own water. Do you have a 401(k)? Consider reducing or suspending your contribution for a while to free up some pay-down cash.

In the black? Excellent. The money left after expenses determines the monthly payment you can afford — that much, and no more. It’s senseless to take on a loan with a $600 monthly payment if you have only $500 after expenses. No matter how minuscule the interest rate, you’re adding to your debt, not eliminating it.

Types of Credit Card Consolidation

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

If you meet the eligibility requirements and you’re serious about getting your financial house in order, debt management plans work best in most cases. Credit card consolidation loans work for individuals with good credit, solid income, and a high degree of personal discipline. If your debt has been sold to a  a debt collector, debt settlement might be your only choice.

Debt Management Programs

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

DMPs do not involve taking out a loan. Your credit score will not be a qualifying factor. Instead, the nonprofit credit counseling agencies that administer DMPs receive breaks from the card companies to reduce interest rates and develop 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. These programs usually take 3-5 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 for consolidating credit card debt is also the most straightforward: Take out a single loan large enough to pay off all your credit card debt (at a far more attractive interest rate), then repay the new loan.

Credit card consolidation loans are all the rage. A study published in April 2020 analyzing first-quarter responses from more than 160,000 personal loan applicants found 38% were consolidating debt — the most-reported reason. An additional 5% specifically cited credit card refinancing.

Personal loans surged more than 10% in 2019, a pace not seen since just before the Great Recession. And that was before the economy was rocked by COVID-19.

We mentioned personal discipline above. Here it is again: 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 a solution is this: Does it make sense to create a new loan (debt consolidation) to satisfy an old loan (credit cards) that you couldn’t pay off to begin with? Answer that one honestly before you proceed any further.

(Waiting while you candidly consult your conscience.)

Good to go? OK: Credit card consolidation loans come in a variety of forms. Any one of them should, at minimum, provide a lower interest rate than what credit card companies charge. If you wind up with a more manageable payment and a fixed payoff schedule, so much the better.

Personal Loans

Like credit cards, personal loans are unsecured. Falling behind or defaulting is a threat only to your credit rating. Because they’re not backed by anything tangible — a house, a car, investments, precious jewels, etc. — interest rates may be somewhat higher than other consolidation schemes.

In early autumn 2020, rates ranged from 6% to nearly 30%.

Most personal loans are made by banks, but there are other attractive avenues to explore. Credit unions bend over backward for their members to beat other lenders’ rates. Credit unions can tweak their lending requirements, especially for good customers.

Online lenders, including peer-to-peer lenders, can consolidate debt, too, but the rates may be too high for it to make sense.

In short, if you’re not reading this in crisis mode, take the time to shop hard for the best available interest rate. You want to beat your overall credit card interest rate, sure, but a couple of points on the average debt consolidation personal loan of nearly $13,000, can be costly. Here’s the breakdown on a three-year payment plan:

3-Year, $13,000 Consolidation Loan
Interest RateMonthly PaymentInterest PaidTotal Repayment
6%$395.50$1,238$14,238
8%$408$1,665$14,665
10%$420$2,101$15,101

Run your own numbers using a personal loan amortization calculator.

Zero-Percent Balance Transfers

This is a reasonably safe option … if you qualify!

Zero-percent balance transfers usually are available to the best customers: consumers, meaning those who make on-time payments every month 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. That’s right: Every penny you send the card company goes to reducing your principal.

Wait. There’s more. You may incur balance-transfer fees of 3%-5% of the amount transferred. And when the introductory zero-percent rate expires, you could be paying 20% interest or more on whatever balance is left.

At the risk of repeating ourselves, zero-percent balance transfers are worth a hard look … but only if you are committed to paying down the debt by the time the introductory rate period ends.

Home Equity Loans

The fact 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.

Cash-Out Refinancing

Here again, you’re putting you dwelling on the line … but with mortgage rates at historic lows, refinancing your home and cashing in some of its equity — a cash-out refinance — to consolidate credit card debt is worth a look.

Besides putting your home at risk, you’ll need to factor in the closing costs — usually between 2% and 6% of the loan amount — and whether you will pay those up front, or roll them into the loan. Weigh the savings in paying them from your funds, making certain the gain from consolidating high-interest credit cards will be more than your out-of-pocket expenses.

On the plus side, a cash-out refinancing leaves you with just one mortgage, not two (if you were considering the home-equity-loan route), and first mortgages tend to carry interest rates about half that of home-equity loans.

Borrow from Retirement

Ideally, this section would amount to four words: Do not do it! Plus these four: Avoid at all costs!

But in the spirit of being honest and forthright — as we have urged you to be with yourself — we can’t very well skip over laying out all your options … including this extremely bad one.

The upside, to the extent it exists, is twofold: Qualifying is easy, and the loan does not appear on credit reports.

The rest, from derailing your retirement plan to risking tax penalties to exposing yourself to creditor predators, is troublesome. The skinny:

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 the unpaid portion as regular income for taxes, plus pay a 10% early withdrawal penalty.

If you borrow, you must pay the money back within five years. If, instead, 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 what you owe in half – and hope the lender will accept that amount as full payment.

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.

Sounds great, right? 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 into debt settlement 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.
  • Creditors will continue to hound you by all means available to them.
  • Don’t believe the commercials. You do not have a “right” to settle your credit card debts for thousands less. 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 slam 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 debtors, none of that matters. They’re happy to be out from under it.

About The Author

Max Fay

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 Debt.org. Max can be reached at mfay@debt.org.

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