5 Ways To Consolidate Credit Card Debt

When you have multiple credit cards – and multiple monthly credit card payments – keeping up with the bills can become a struggle. Luckily, a few carefully planned strategies can consolidate credit card debt into one manageable payment – and possibly save money in interest.

To help you consolidate credit card debt and decide which debt consolidation strategy is right for your situation, let’s look at some popular methods for accomplishing this goal.

Debt consolidation involves combining multiple payments or loans into a single monthly payment. This concept lets people struggling to get out of credit card debt merge their balances into a new account, making it easier to manage multiple debts.

Credit card debt consolidation often benefits borrowers by enabling them to secure a lower interest rate and spend less on monthly debt payments. If you don’t qualify for an interest rate that’s lower than the average rate of your various monthly debt payments, consolidating your debt might not be worth the trouble, however.

It’s important to note that people struggling with credit card debt must meet certain lender requirements to move forward with a debt consolidation strategy. Debt consolidation lenders typically consider the amount of debt owed as well as the borrower’s credit score, 401(k) and property investments.

It’s possible to consolidate credit card debt in several ways, but the key is to choose the option that works best for your situation. To determine which path to take, consider factors such as how much debt you have to repay, your current interest rates and your personal credit history.

You can consolidate your credit card debt through any of the strategies detailed next.

1. Apply For A Personal Loan

One option is to utilize a personal loan to use as a debt consolidation loan. This involves the process of taking out a new loan to pay off multiple unsecured loans, including credit cards. Getting a personal loan is a popular method of consolidating credit card debt because it provides borrowers with a fixed interest rate and repayment period.

With a debt consolidation loan, you borrow the amount of money needed to repay your outstanding credit card balances, then pay preset monthly installments, plus interest, for the life of the loan. The loan amount and interest rate are based largely on the borrower’s credit score, which must be in “good” standing to qualify. Borrowers can apply for a personal loan through banks, credit unions and online providers of loan options.

2. Use A Balance Transfer Credit Card

A balance transfer credit card provides financial relief by allowing borrowers to move balances from one or more credit cards to a card with a lower interest rate. While a balance transfer doesn’t erase the debt owed, it allows borrowers to pay down their balance faster with a lower annual percentage rate (APR). Most major credit card companies grant balance transfers, and some even extend low-interest introductory or 0% APR offers to borrowers with satisfactory credit.

The best way to utilize a balance transfer credit card as a debt consolidation tool is to make all monthly payments on time and pay more than the minimum balance. That way, you can avoid accruing interest at the card’s regular APR after the special introductory period ends.

3. Work With A Credit Card Counselor

Credit counseling is a service typically provided by nonprofit agencies staffed by professionals certified in money and debt management, budgeting and consumer credit options. If you decide to go this route, be sure to do your research and find a reputable counselor. Also, make sure you understand any fees you’ll have to pay for the counselor’s services.

Once a credit counselor has examined the details of your financial situation, they’ll help you create a personalized debt management plan to consolidate your credit card debt. Their goal is to roll several outstanding debts into one lower monthly payment that you’ll pay directly to the credit counseling service, which will distribute funds to each creditor on your behalf. Credit card counselors can also help you negotiate lower interest rates, stop calls from collection agencies and potentially convince creditors to waive late fees.

4. Apply For A Home Equity Loan

In some situations involving credit card debt, borrowers may choose to take out a home equity loan¹ to cover the cost of their high-interest debt. A home equity loan allows homeowners to borrow against the equity they have in their home and then pay it back over the next 5 – 15 years.

Homeowners can determine how much equity they have in their home by subtracting what they still owe on their mortgage from the current value of the home. For example, if your home is worth $350,000 but you owe $100,000 on the mortgage, you have $250,000 in equity. Your home equity loan lender likely won’t let you borrow the full amount, though.

While a home equity loan is a relatively low-cost option for financing a home improvement project or another major purchase, it’s only recommended as a debt consolidation strategy in rare situations.

You could also look into getting a home equity line of credit (HELOC), which works similar to a home equity loan but in the form of a credit line.

5. Use Your 401(k) Savings

Similar to taking out a home equity loan, dipping into your 401(k) savings is a high-risk option for credit card debt consolidation. It’s important to recognize that taking out a 401(k) loan before you reach the eligible age of 59 ½ will result in early withdrawal penalty fees, reduce your retirement fund and lead to other potential fees if you don’t repay the money on time.

With that in mind, a 401(k) loan can be an option for consolidating credit card debt if you’ve exhausted all other options. This tactic leads to a lower interest rate than other unsecured loans, plus the action won’t show up on your credit report or affect your credit score.

The risks involved in consolidating credit card debt depend on your method of credit card debt consolidation. Let’s take a look at the downsides of each of the five consolidation options discussed above.

• Personal loans: If you plan to apply for a personal loan, prepare to pay an origination fee of 1% – 8% of the loan amount. In addition, lenders require that all applicants undergo a hard credit inquiry, which will most likely cause your credit score to temporarily drop by a few points.
• Balance transfers: To qualify for a balance transfer credit card with 0% APR, borrowers must have a “good” credit score, or they’ll otherwise be denied or stuck with a high interest rate. If you do qualify, pay attention to any balance transfer fees, which can be as high as 5% of the amount transferred.
• Credit counseling: Borrowers should be ready to discuss and nail down a long-term plan to repay debts within 3 – 5 years, potentially stretching their budget too thin. Additionally, you can’t use your credit or get approved for new credit while enrolled in a debt management program.
• Home equity loans: Using a home equity loan to cover credit card debt creates two monthly mortgage payments, with a higher interest rate on the “second mortgage,” which is the home equity loan. The riskiest part of a home equity loan is having to use your house as collateral. That means you could lose your home to foreclosure if you don’t pay your home equity loan on time each month.
• 401(k) loans: Your 401(k) is connected to your employer, so if you lose or leave your job, you’ll have to pay back the loan by Tax Day of the next year. If your employment situation stays the same, a 401(k) loan is typically due for full repayment in 5 years.

Borrowers with poor or “bad” credit might not qualify for a debt consolidation loan. Even if they do, they may be hit with a super-high interest rate. Those with good or excellent credit will have a wider variety of debt consolidation options, so take steps to improve your credit score if you don’t want your options to be severely limited. 

Debt consolidation can hurt your credit score in a number of ways. Consolidating options such as personal loans, balance transfer cards and home equity loans require a hard credit inquiry, which can temporarily lower your credit score. Closing credit card accounts can also affect your credit utilization and credit mix.

You can avoid credit checks by using a 401(k) loan or enrolling in a debt management plan, but closing accounts will still affect your credit. You can also borrow from family members or friends, or dip into an emergency fund, to avoid a credit check.

Ultimately, paying off any debt will temporarily lower your credit score, but falling behind on your monthly payments or defaulting on your debts can hurt your score in a more long-lasting way.

Still on the fence about credit card debt consolidation? See what other people are asking about this topic and how we’ve answered their questions.

What is the best way to consolidate credit card debt?

The “best way” depends on your financial situation and what you qualify for. If you can afford the monthly payments and are eligible for a lower interest rate, a personal loan might suit you best. A balance transfer may also work well if you believe you can pay the credit card off within the 0% APR period.

Can I still use my credit card after debt consolidation?

Yes, you can typically still use your credit card after consolidating your credit card debt, but you should be very mindful of how much you spend while paying down your consolidated balance. However, if you’re enrolled in a debt management plan, you won’t be able to use your card or apply for new credit until the program ends.

What’s the difference between debt consolidation and credit card refinancing?

Credit card refinancing is another way to say “balance transfer,” which, as explained earlier, is a method of credit card debt consolidation. Moving your credit card balance over to a new card is essentially the same as a loan refinance, because you’re using your new credit card to pay off your existing debt.

A balance transfer, or refinance, primarily differs from a debt consolidation loan in that a loan will have a fixed interest rate and consistent monthly payments. With a credit card, your monthly payment amounts will likely vary. And, following a balance transfer, you’ll likely have 0% APR for only a certain period of time.

Should I consolidate my credit card debt?

Debt consolidation may be a good idea if:

• You want a better interest rate or repayment term
• You’re managing too many open credit accounts
• Your credit is healthy enough to get a better rate and loan term
• You have the cash flow to cover the new monthly payment

However, if you’re unable to qualify for a better interest rate, additional fees and costs negate what you could save by consolidating credit card debt. If you’re already struggling to repay your debts, debt consolidation could make your life even harder.

If you feel like you’re drowning or about to drown in credit card debt, consolidating your debt has the potential to dramatically improve your financial situation. At the very least, you can replace your multiple monthly payments with a single one, which can simplify your life.

That alone probably isn’t enough reason to consolidate, though. But if you’re able to secure a lower interest rate than the average rate of your previous debts, it’s worth going the consolidation route – which can make your dream of a debt-free life closer to becoming your reality.

Interested in a debt consolidation loan? Start your personal loan application today with Rocket Loans℠.

¹Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 2/5/2024 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00. Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Schwab products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher priced loans are not allowed on properties located in New York. Additional restrictions apply. This is not a commitment to lend.