How to consolidate credit card debt: 5 strategies

Credit cards can be a useful financial tool, but it can be easy to find yourself saddled with credit card debt after a few months when you need to pay unexpected bills or accidentally overspend.

Interest rates for credit cards can be quite high, and it can be a hassle dealing with multiple credit card bills each month. Consolidating your credit card debt can help make your debt more affordable and turn multiple payments into a single bill, which may be easier to handle.

We’ll break down five of the best ways to consolidate credit card debt to help you save money and make your payments more manageable.

Key Takeaways

• Credit cards typically have very high interest rates
• Debt consolidation lets you combine multiple credit card debts into one debt with a single payment
• Consolidation can reduce your interest rate, saving money
• There are many ways to consolidate credit card debt, each with pros and cons

How does credit card debt consolidation work?

Credit card debt consolidation involves taking out a new loan and using that loan to combine multiple credit card debts into one. Imagine you have three credit cards with balances of $7,000, $5,000, and $2,500. You could consolidate those debts by taking out a new $14,500 loan and using that money to pay off each credit card.

Consolidation lets you combine multiple payments into one, making it easier to handle the bill. Often, you can consolidate multiple debts into one that has a lower interest rate or monthly payment, which can free up space in your budget and save you money.

However, debt consolidation may not be an option for everyone. It may be difficult to qualify for a loan if your credit score is lower than you would like, for example, or don’t have sufficient assets.

Review your options for debt consolidation

There are many options for debt consolidation. Most involve applying for a new loan. We’ll cover some of the most popular options so you can decide which is right for you.

1. Apply for a personal loan

Personal loans are a popular way to consolidate credit card debt. They are highly flexible, and you can qualify for one without needing to provide any collateral. They also tend to have lower interest rates than credit cards.

Usually, you can get these loans from a variety of banks, credit unions, and online lenders. Some even offer specialized debt consolidation loans. However, keep in mind that because these loans are unsecured, qualification requirements may be higher than other options. Lenders often look for people who have at least fair credit, meaning scores between 610 and 640 or higher.

2. Use a balance transfer credit card

Many credit cards come with perks or special offers to entice people to apply for them. One type of offer is a 0% APR offer. So long as you make the minimum payment each month, the card charges no interest for a period after you receive it, often about 18 months.

If you can qualify for one of these cards, you can transfer your other credit card balances to it and take advantage of the 0% interest rate. You may pay a fee for the balance transfer, typically a few percent of the amount transferred.

However, once the promotional period ends, you’ll have to pay the full interest rate on your balance, so it’s important to pay the balance off in full before that period ends. Credit limits on these cards may also be lower than the amount you can borrow with other options, like personal loans, so they’re best for consolidating smaller balances.

3. Work with a credit card counselor

Credit counseling is a process where a financial expert works with you to analyze your financial situation and money habits, then helps you come up with a plan to handle your money more effectively. That can mean coming up with a budget and building a debt repayment plan.

In some cases, counselors can help you consolidate your debt by handling payments on your behalf, working with your creditors, or helping you apply for a loan.

If you want credit card counseling, it’s important to do your due diligence. The industry is, unfortunately, popular among scammers. You need to read over any payment plan carefully to make sure you understand how your money is being used and that your creditors get paid regularly.

For more information on how to make sure a credit counselor is legitimate, you can visit the Federal Trade Commission’s website on credit repair scams.

4. Apply for a home equity loan

If you own a home, you may be able to access your home equity to pay off your credit card debts.

Home equity loans can have high borrowing limits if you have sufficient equity. Typically, you can borrow up to 20% of your home’s value. They also typically have low rates because of the security your home provides to the lender when it serves as collateral.

Payment periods can also be long, ranging from 5 to 15 years, keeping payments manageable.

However, using your home as collateral for the loan means you’re exchanging unsecured credit card debt for secured home equity debt. In effect, you’re putting your home at risk of foreclosure to save money. It’s essential that you’re confident you can handle payments on your new home equity loan before you commit. You can learn more about home equity loans offered by Rocket Mortgage^® here.

Home equity lines of credit (HELOCs) can be another option, but they are typically designed for situations where you need access to cash multiple times, so a home equity loan is likely the better fit due to its lump-sum funding.

5. Use your 401(k) savings

401(k)s are retirement accounts that offer tax incentives when you put money aside for your retirement. However, just because the money is set aside for retirement doesn’t mean you can’t access the cash if you’re in a debt crunch.

Taking money out of your account is possible, but you’ll have to pay income taxes on any amount withdrawn, plus a 10% penalty, plus take money away from your own retirement savings, making this a last resort option.

You can also consider a 401(k) loan. You take money out of your 401(k), penalty-free and tax-free, and have to pay the money back. This is also a high-risk plan because failing to make payments could lead the loan to be seen as an early distribution instead, meaning you’d have to pay the 10% penalty plus taxes.

If you’re over 59 ½, you may be able to withdraw funds from your 401(k) without penalty, but you still need to pay income taxes. Before making a decision to withdraw funds from your 401(k), consult with a tax professional to make sure you understand any regulations or penalties that could be involved.

What are the risks of consolidating credit card debt?

Consolidating credit card debt can help you make payments more manageable and can save you money, but there are risks involved. What risks you face will depend on how you choose to consolidate.

• Personal loans: Applying for a personal loan typically involves a hard inquiry on your credit, which drops your credit score. They may also carry origination fees, which add to your debt. Failing to make payments can also lead to fees and damage your credit.
• Balance transfers: Balance transfer cards can be hard to qualify for. The 0% APR term on these cards usually only lasts a year to a year and a half, so if you can’t pay the balance off quickly, you’ll wind up with high-interest credit card debt again.
• Credit counseling: It can be hard to find a good credit counselor, and repayment plans usually only last a few years. You may find yourself struggling if you can’t pay the debts off in those years. Some credit counseling plans also limit your options for things like future borrowing until you complete the payment plan.
• Home equity loans: Home equity loans are the only option if you own a property with sufficient equity. You’re also trading unsecured debt for secured debt, meaning you could lose your home if you default. However, interest rates are usually quite low, saving you a lot. Consider applying for a home equity loan with Rocket Mortgage if you think this is the right option for you.
• 401(k) loans: These should be the last resort for people looking to consolidate debt. It puts your retirement savings at risk and could lead to stiff penalties and tax payments if you can’t pay the loan back quickly enough.

Also, keep in mind that you may not be able to qualify for some debt consolidation loans. You might need to take steps to boost your credit before applying.

How to consolidate credit card debt without hurting your credit

In general, pursuing debt consolidation will have a negative impact on your credit at first. Usually, it involves applying for new loans, which leads to hard credit pulls. However, as you pay down your debt, your credit will likely improve.

Other options that don’t influence your credit, like 401(k) loans, damage your financial health in other ways.

If you want to preserve your credit, you can consider paying down your debt out of any savings you may have. You could also ask family or friends for help with consolidating or paying off your debt, but be sure that you don’t let money damage your relationship.

FAQ

Before you pursue debt consolidation, it’s important to consider all of your options and make sure you understand how the process works.

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 time span.

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 balance transfer 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?

• 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, you should consider whether debt consolidation is a good idea based on the terms you’re offered.

The bottom line: Choose the credit card debt consolidation strategy that works for you

Debt consolidation lets you turn multiple credit card debts into one debt with a single payment that is easier to manage. In many cases, you can also reduce the interest rate of your debt through consolidation, saving you money. However, most ways of consolidating your debt involve risk, so be sure to do your due diligence and make sure you understand what you’re getting into.

If you’re ready to consolidate your debt, you can consider applying for a debt consolidation personal loan with Rocket Loans℠.

Rocket Loans does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.