How To Consolidate Credit Card Debt
Hanna Kielar6-Minute Read
UPDATED: October 18, 2022
When you have multiple credit cards – and multiple monthly credit card payments – keeping up with the bills can become a struggle. Luckily, a few life-saving strategies can consolidate credit card debt into one manageable payment – and possibly save money in interest.
To show you how to consolidate credit card debt and help you decide which strategy is right for your situation, let’s look at some popular consolidating methods.
How Does Credit Card Debt Consolidation Work?
Debt consolidation involves combining multiple payments or loans into a single monthly payment. This concept allows people struggling to get out of credit card debt to merge the balances into a new account, making it easier to manage multiple debts.
Credit card debt consolidation benefits borrowers by enabling them to secure lower interest rates and monthly payments. If you don’t qualify for an interest rate that’s lower than your combined rate, consolidating your debt might not be worth the trouble.
It’s important to note that people struggling with credit card debt must meet the lender’s eligibility 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.
Best Ways To Consolidate Credit Card Debt
While it’s possible to consolidate credit card debt in several ways, the key is to choose the option that best fits your needs. To determine which path to take, consider factors such as how much debt you have to repay, your current interest rate and personal credit history.
You can consolidate your credit card debt through any of the strategies detailed below.
Apply For A Debt Consolidation Or Personal Loan
One option is to apply for a debt consolidation loan, which is the process of taking out a new loan to pay off multiple unsecured loans, including credit cards. This type of personal loan is a popular method of consolidating credit card debt because it provides borrowers with a fixed interest rate and repayment period. Simply put: 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 debt consolidation loan amount and interest rate are based 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 options.
If you plan to apply for this type of loan, prepare to pay an origination fee of 1% – 8% of the loan amount. In addition, loan lenders require that all applicants undergo a hard credit inquiry, which will most likely cause your credit score to drop by a few points.
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 less interest. 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 annual percentage rate (APR) after the special introductory period ends.
The downsides to balance transfer credit cards are their high credit standards and transfer fees. 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 fee. If you do qualify, pay attention to the card’s balance transfer fees, which can run up to 5% of the amount transferred.
Establish A Debt Management Plan With A Credit Card Counselor
Credit card 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 to find a reputable counselor and make sure you understand any fees you’ll have to pay for their service.
Once the professional counselor has examined the details of your financial situation, they will help you create a personalized 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 negotiate lower interest rates, stop calls from collection agencies and potentially waive late fees from creditors.
However, borrowers should be ready to commit to their credit card counseling agency for the long haul. This debt payoff tool helps you create a long-term plan to repay debts within 3 to 5 years. Additionally, you can’t use your credit or get approved for new credit while enrolled in a debt management program.
Apply For A Home Equity Loan
In some situations involving credit card debt, borrowers may choose to take out a home equity loan to cover the cost of their high-interest debt. A home equity loan allows homeowners to borrow against the value of their home and then pay it back over the next 5 – 15 years.
Homeowners can determine the potential amount of their home equity loan 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 could potentially borrow $250,000 through a home equity loan.
While home equity loans are a low-cost option for financing a home improvement project or other major purchase, it is only recommended as a debt consolidation strategy in rare situations. Using a home equity loan to cover credit card debt creates two monthly mortgage payments, with a higher interest rate on the “second mortgage.” The riskiest part of this method is putting your house down as collateral on the home equity loan, which, if not paid on time, could result in foreclosure of the home.
Consider 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 59.5 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, 401(k) loans can be an option for consolidating credit card debt if you’ve exhausted all other options. This tactic provides lower interest rates than other unsecured loans, plus the action won’t show up on your credit report or affect your score.
It’s important to remember that 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. Unless your employment situation changes, 401(k) loans are typically due in 5 years.
Should You Consolidate Your Credit Card Debt?
Wondering if debt consolidation is a good idea? Ask yourself the following questions:
- Do I want better interest rates or repayment terms?
- Am I managing too many open credit accounts?
- Is my credit healthy enough to get better rates and terms?
- Do I have the cash flow to cover the new monthly payment?
If you answered “yes” to any or all of these questions, consolidating your debt could be the right move. However, if you’re unable to qualify for a better interest rate, additional fees and costs negate what you could save, or you’re already struggling to repay your debts, debt consolidation may just make your life harder.
How To Consolidate Credit Card Debt Without Hurting Your Credit
Debt consolidation can hurt your credit score in a number of ways. Consolidating options like personal loans, balance transfer cards and home equity loans require hard inquiries, which can temporarily lower your credit score. Closing accounts can also affect your credit utilization and mix.
You can avoid credit checks with a 401(k) loan or by enrolling in a debt management plan, but your credit will still be affected by the closing of accounts. You can also borrow from family or friends, or dip into an emergency fund to avoid credit checks.
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.
If you feel close to drowning in credit card debt, consolidating your debt can simplify your repayments. By replacing your many monthly payments with a single one and having a potentially lower interest rate, your dream of paying off your debt can feel more like reality.
Interested in a debt consolidation loan? Check out your personal loan rates and terms by prequalifying with Rocket Loans℠.
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