In theory, consolidating credit card debt sounds like a good idea. Replacing high-interest credit card debt with a credit product that has a lower interest rate could help reduce the amount of interest you ultimately pay on the debt.
There are a number of ways to consolidate credit card debt — all of them with their pluses and minuses. Some choices are better than others. But the goal of all of them is basically the same: to combine your high-interest debt, leaving you with one monthly payment at a more reasonable rate.
If you’re considering consolidating your debt, it’s important that you find the option that works best for you and offers you the lowest-cost way to get out of debt.
If you have several credit cards with high interest rates and large balances, you may consider consolidating your debt. This means taking out a new credit product, such as a personal loan, to pay off your existing credit card balances and leave you with a single monthly payment.
You might choose to do this for a number of reasons. For example:
There are several good reasons to consolidate your credit card debt, including:
You can get caught up on past-due accounts. With debt consolidation, you can pay off debts that are past due, which can help improve your credit score. Just keep in mind that it may be more challenging to qualify for a debt consolidation loan or another credit card with past-due accounts.
Because consolidating your credit card debt means taking out a new credit product, you’ll need to apply for one. Here's how it works:
You can compare debt consolidation options, including personal loan rates, for free through Credible.
As you evaluate whether to consolidate your credit card debt, be sure to keep a few things in mind.
Debt consolidation’s effect on your credit depends on the method you choose and where your financial situation currently stands. Consolidating with a personal loan, for example, could help your credit score by reducing the amount of revolving debt you have. Using a balance transfer credit card, however, could hurt your score if you’re pushing your credit limit.
You may consider working with a nonprofit credit counselor to help weigh your options and how they’ll affect your credit in the long-term. They can also help you learn ways to avoid credit problems in the future.
If you’re considering credit card consolidation, here are some options to consider.
With a balance transfer, you move the amount you owe on your current credit cards over to a new credit card.
Many credit card companies offer 0% balance transfer options to encourage people to use them to consolidate debt on a new card with no interest for a limited period of time (for a small fee).
A 0% balance transfer offer can be a good option for people with relatively small credit card balances who just need a small respite from interest payments to catch up. The 0% introductory rate on a balance transfer card must last at least six months if you make your payments on time.
But you need to be disciplined and pay off your balance before the 0% period expires, otherwise you could be on the hook for interest from the entire promotional period.
CHECK OUT THE PROS AND CONS OF BALANCE TRANSFER CREDIT CARDS
A personal loan generally refers to an unsecured, fixed-rate installment loan you get from a bank, credit union, or other lender.
You repay an unsecured personal loan with a set monthly payment, and it doesn’t use your home or other asset as collateral.
Personal loans can be a good option if you’re juggling multiple credit cards with high interest rates and high minimum payments — and have enough income to cover your new payment. It’s especially good for people with a high enough credit score to qualify for the lowest interest rates.
Credible can help you compare personal loan rates and get pre-qualified for a personal loan.
Peer-to-peer lending is done through websites that match people looking for small, unsecured loans with investors wanting a return on investment.
Like a personal loan from a bank, these peer-to-peer loans tend to be fixed-rate, though they are often shorter-term and smaller.
Peer-to-peer loans can be a good option for tech-savvy people who need a small loan they can repay quickly.
Credit counseling is done by certified professionals trained in helping you understand your financial situation.
Your counselor will be able to help you put together a strategy for reducing your money troubles.
Credit counseling can be a good first step for someone who doesn't feel they have a good handle on their finances and isn’t sure whether consolidating their debt will help them become debt-free.
A debt management plan may be an option from your credit counseling agency.
Under these plans, you’ll make one payment to the counseling agency each month or each paycheck, and they’ll handle payments to all your creditors.
Debt management plans may be a good option for people feeling overwhelmed by their credit card debt who are looking for more extensive help and guidance.
LEARN ABOUT HOW DEBT RELIEF PROGRAMS CAN HELP PAY OFF YOUR LOANS
Not all options for debt consolidation are good choices for everyone. Some may not be right for your situation, while others are almost never a good idea for anyone.
With a home equity loan, you borrow against the value you’ve built up on your home.
Your home equity is the difference between how much you owe on your mortgage and how much your home is worth. A home equity loan is typically a lump sum loan that you pay back at a fixed interest rate.
A home equity line of credit (HELOC) allows you to make multiple draws over a period of time, and is usually paid back at an adjustable rate.
You may need to use a home equity loan to consolidate credit card debt if you can’t qualify for other options but have a significant amount of equity in your home.
In a cash-out refinance, you take on a new mortgage loan for a larger amount than you currently owe.
Your new mortgage pays off your old loan, and the balance comes to you as cash.
If you’re refinancing your mortgage anyway, it may be worthwhile to put some of the proceeds toward your credit card debt.
These loans are relatively rare, but some credit unions offer them. They are similar to car title loans — a short-term, very-high-interest loan you’ll find in several states.
How it works
A vehicle equity loan uses your car as collateral. The lender will hold on to your car’s title and give you a loan based on the difference between the vehicle’s value and any money you owe on it.
You might need to use a vehicle equity loan if your credit union offers them and you have a relatively new car that’s paid off.
Some 401(k)s or other retirement plans may offer loans.
You may be able to borrow up to 50% of the money in your account, or $50,000 — whichever is less. Then you’ll need to pay it back within five years, with payments made at least quarterly.
Because of its possible impact on your tax obligation and future financial security, this option should be a last resort. You may consider a retirement plan loan if you have a stable job with a 401(k) plan that offers loans.
You can potentially borrow money from a life insurance policy.
Some types of life insurance have a "cash value" based on how much you’ve paid into the policy and how long you’ve had it. You may be able to borrow up to the cash value of your policy from your insurer.
If you have a significant cash value in your policy and have a plan to quickly repay the loan, this might be an option for you.
Getting rid of high-interest credit card debt can be a big step toward improving your finances. And there are many good ways to go about it, including consolidating credit card debt into a lower-cost debt.
Some options, such as personal loans or 0% balance transfer cards, may generally have more advantages than disadvantages — but everyone’s situation is different. Before you decide on a method for consolidating credit card debt, be sure to thoroughly explore all your options.
Credible can help you compare rates and offers from multiple personal loan lenders.
