Carrying a healthy balance on multiple credit cards is a responsible way to establish and maintain a credit history—good credit scores often translate to greater borrowing power. But high interest rates on credit cards make it easy to rack up balances that are too high if you’re not careful.
If you sense your credit card debt is inching toward an uncomfortable level, or you want to find a way to save some money while addressing it, credit card debt consolidation is a common way to pay off your debt. Learn how to consolidate credit card debt and how leveraging the solution may help you keep more cash on hand for unexpected expenses.
Key considerations
- To pay off your credit card debt, you can get a personal loan, apply for a home equity line of credit (HELOC), or leverage balance transfer credit cards.
- Consolidating generally makes sense if the new debt has a lower interest rate than your credit cards. In some cases, a debt consolidation loan can actually save you money over time and leave you with extra cash in your pocket each month.
- The best way to consolidate debt will depend on your outstanding card balances, monthly income, and expenses. Your credit score will also determine the rates and terms you qualify for.
What is credit card debt consolidation?
Debt consolidation is a process that involves combining multiple debts into a single loan, often at a lower interest rate. When used to attack credit card debt, many people opt to consolidate balances with varying annual percentage rates (APRs) into one loan with a fixed monthly payment.
Exactly how you pay off your credit card balances depends on the chosen consolidation product or method. Your options for how to consolidate credit card debt include:
1. Apply for a debt consolidation loan
Online lenders, banks, and credit unions offer debt consolidation loans, sometimes called personal loans for debt consolidation, which give you a lump sum to pay off your balances. These loans simplify your payment schedule and can have lower rates than credit cards, especially if you have excellent credit. However, you may be required to pay an upfront origination fee. Fees typically range from 1% to 8%.
2. Leverage a credit card balance transfer
Using a balance transfer card, you can move credit card balances from other cards to a new card with a lower introductory rate. These cards can save you a significant amount of interest, as long as you pay down the balance within the allotted promotional timeline. You might also have to pay a fee when moving balances from one card to another. Still, these cards can be a wise option for people with good credit scores who have debt that falls within the new card's credit limit.
3. Consider a debt management plan
If you don’t qualify for other consolidation options, you may be able to leverage a debt management plan offered through a credit counseling agency. Here, a credit counselor will contact your creditors on your behalf and negotiate a single monthly payment amount you can comfortably afford based on your outstanding debts. Consider this only after exhausting other options, as creditors aren’t obligated to work with you, and you risk severely damaging your credit score.
If you need to access a lump sum of money to pay off debt, you also have the following options:
1. Take out a home equity loan
If you have significant equity in your home, you can use it to pay off debts with a home equity loan or home equity line of credit (HELOC). Home equity loan rates are generally lower than personal loan rates, but they often come with closing costs. Plus, you’ll put your home at risk if you cannot make payments.
2. Withdraw from your 401(k)
If absolutely necessary, you can borrow half of the amount in your 401(k), up to $50,000 per the IRS, to help pay off your debts. The interest rates on these loans are quite reasonable, and they don’t show up on your credit report, so they won’t impact your credit score. However, this could drastically decrease your retirement savings, and the penalty for defaulting is significant.
Why consolidate your credit card debt?
Consolidating credit card debt combines multiple balances into a single, more manageable monthly payment. Many who choose to bundle balances receive lower, fixed interest rates, helping you get control of your finances and work towards a debt-free future.
For credit card debt consolidation to make sense, the new consolidation should generally have a lower interest rate than your credit cards. This way, you’ll save money on interest and have more funds available to put toward other expenses.
Pros of debt consolidation:
- Simplified payments: Tracking single payments makes managing finances easier and reduces stress.
- Potential for lower interest rates: If your credit score is up to par, you may be able to secure a lower interest rate than you're currently paying on your existing debts.
- Improved credit score: While applying for a new loan or credit card could temporarily decrease your score, the score could increase over time as you make consistent, on-time payments and lower your credit utilization.
- Possible to get a larger loan: Debt consolidation loans often have higher amount limits, which means you can borrow enough to consolidate larger amounts of credit card debt. For example, BHG Financial offers loan amounts up to $200,0001 for the purpose of debt consolidation.
Cons of debt consolidation:
- Upfront fees are common: Many debt consolidation loans come with origination fees, while other products may come with balance transfer fees or annual fees, which can contribute to the overall cost.
- Risk of accumulating more debt: You risk overspending if you don’t first address the habits that led to debt accumulation. For example, if you pay off high-interest debt but continue to use your cards heavily, you may fall into a vicious cycle.
- Higher long-term costs: While longer repayment terms can help keep monthly payments low, the extended timeline also leads to higher interest costs over time.
- Savings are not guaranteed: Borrowers with lower credit scores may have a tougher time securing lower interest rates on a loan or line of credit. Debt consolidation often makes the most sense for individuals with good credit histories and responsible spending habits.
How can a personal loan consolidate credit card debt?
One common way to address credit card debt is to use a personal loan for debt consolidation offered by lenders. This is an installment loan that provides a lump sum of money to pay off your outstanding balances. Instead of paying several creditors by their due dates, you’ll only pay one creditor each month: the lender.
Before you're approved for a debt consolidation loan, lenders will evaluate your credit history and personal finances to determine whether you qualify and at what terms. Loan amounts typically range from $1,000 to $100,000, although BHG Financial offers amounts as high as $200,000.1
Can a debt consolidation loan save you money?
There are several ways a debt consolidation loan can save you money.
- In many cases, the interest rate on a debt consolidation loan is lower than the rate on your credit card(s). This helps you save significantly on the total interest paid toward your debt.
- Your monthly payment on a consolidation loan will likely be smaller than your existing payments because future payments will spread out over a new, extended loan term. If your budget allows, consider making extra payments with the money you save each month to pay off the debt faster.
To ensure you get the most favorable rates, shop around and focus on lenders that offer a simple online prequalification process. A payment estimator can also help you explore how your monthly payment changes based on the repayment term.
