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 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 eight ways to consolidate credit card debt:

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

Credit cards being consolidated on table

What Are the Types of Credit Card Consolidation?

As mentioned earlier, there are eight 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. Credit card consolidation loans work for individuals with a good credit score. If your debt has been sold to 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 concessions from the card companies to reduce interest rates and develop an affordable monthly payment, based on your income.

Those concessions will drop interest on your credit card debt 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 in 3-5 years, they enroll you in a debt management program.

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

Credit Card Consolidation Loans

The most popular choice for consolidating credit card debt is to take out a loan large enough to pay off all your credit card debt (at a far more attractive interest rate), then repay the new consolidation 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.

We mentioned personal discipline and here it comes again: Debt consolidation loans make sense, but only if you plan to stop using credit cards while you pay off the new loan. 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. (We’ll wait while you candidly consult your conscience.)

Good to go? OK: Credit card consolidation loans come in a variety of forms. If you choose one, at minimum, it must provide a lower interest rate than what credit card companies charge.

Personal Loans

Most personal loans are unsecured, meaning you don’t need collateral. 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 loans.

In early 2021, rates ranged from 6% to nearly 36%.

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.

Here’s the breakdown on a three-year, $13,000 loan at various rates:

3-Year, $13,000 Consolidation Loan
Interest RateMonthly PaymentInterest PaidTotal Repayment

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. Every penny you send the card company goes to reducing your principal.

However, you likely will 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.

Borrow from Retirement

Ideally, this section would amount to four words: Do not do it!

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.

Qualifying is easy, and the loan does not appear on credit reports. The rest, from derailing your retirement plan to risking tax penalties, is troublesome.

Most 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 or younger pay a 10% early withdrawal penalty. If you don’t repay the money, you will have to claim the unpaid portion as regular income for taxes.

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.

Things you need to know about debt settlement include:

  • The process typically takes 2-3 years.
  • Debt settlement companies want you to send them the 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 listen to debt settlement companies.
  • If you use debt settlement, it stays 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 add late fee payments and interest – plus the company’s service fees – your actual savings could be closer to 20%-25%.

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

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.


Before you can dig out, you must know how large a hole you’re in. So, gather your credit card bills and add ’em all up. Get the total amount owed.

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. A larger amount likely will involve a more comprehensive program like debt management or settlement.

Next, get a total for your monthly after-tax income. Make it an honest number.

Now, add up your monthly expenses (excluding credit card payments) and subtract the number from your monthly income. There should be — knock on wood — some money left over.

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

In the black? Excellent! The money left after expenses determines the monthly consolidation payment you can afford — that much, and no more.

About The Author

Max Fay

Max Fay has been writing about personal finance for 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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