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5 Strategies To Consolidate Credit Card Debt

5-Minute Read

To those struggling with credit card debt, the escalating number of unpaid statements and outstanding balances can loom over you. And once it starts, it’s difficult to regain control over the final outcome.

Although the average U.S. credit card debt has dropped for the first time in nearly a decade, millions of Americans have delinquent accounts that negatively impact their credit scores and interest rates.

Luckily, there are a few life-saving strategies to consolidate credit card debt into one manageable payment. In this article, we’ll review the nuts and bolts of each method for consolidating credit card debt to help you decide which strategy is right for you.

How Does Consolidating Credit Card Debt Work?

So, what is debt consolidation? When you consolidate debt, you’re simply combining multiple payments or loans into a single monthly payment. This concept allows people struggling to pay down several credit cards 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 that 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.

How To Consolidate Credit Card Debt

While there are several ways to consolidate credit card debt, the key is to choose the option that best fits your situation. To determine which path to take, consider factors such as how much debt you have to repay, your current interest rates and personal credit history.

1. Use A Balance Transfer Credit Card

A balance transfer credit card provides financial relief by allowing borrowers to move existing 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. Almost every major credit card company grants 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.

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, otherwise they will 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.

2. Apply For A Debt Consolidation Loan

Another 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, and then pay preset monthly installments, plus interest, for the life of the loan.

The debt consolidation loan amount and interest rate is based on the borrower’s credit score, which must be in “good” standing to qualify. Borrowers can apply for this type of loan through banks, credit unions and online options, including Rocket Loans, which could approve and fund your loan within 24 hours.

If you plan to apply for this type of loan, prepare to pay an origination fee of 1 – 8% of the total loan amount. In addition, loan lenders require a hard credit inquiry for all applicants, which will most likely cause your credit score to drop by a few points.

3. Establish A Debt Management Plan With A Credit Card Counselor

The process of consolidating credit card debt can feel overwhelming, so some people opt to seek help from a credit card counselor. Credit card counseling is a service that’s typically provided by nonprofit agencies that are staffed by professionals who are 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 will be paid 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 to create a long-term plan to repay debts within 3 to 5 years. Additionally, you cannot use your credit or get approved for new credit while enrolled in a debt management program.

4. Apply For A Home Equity Loan

In some credit card debt situations, 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.

5. 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 potential additional fees if the money isn’t repaid on time.

With that in mind, 401(k) loans can be an option for consolidating credit card debt, if all other options have been exhausted. This tactic provides lower interest rates than other unsecured loans, plus the action will not show up on your credit report or affect your score.

Don’t forget: Your 401(k) is connected to your employer, so if you lose or leave your current job, you’ll have to pay back the loan by Tax Day of the next year. If your employment situation doesn’t change, 401(k) loans are typically due in 5 years.

Should I Consolidate My Credit Card Debt?

The primary goal for consolidating credit card debt is clear: Reduce your costs and simplify your finances. Here are three financial factors to consider into your plan to consolidate your credit card debt.

Amount Of Debt

The first step to any kind of debt consolidation is getting a clear picture of exactly how much money you owe. Start by making a list of your outstanding credit card balances, the required monthly payment and their interest rates – and then add them together to determine the total debt owed.

Then, consider whether it would be possible to repay those credit card debts within 5 to 7 years through one of the above consolidation strategies. If the debt is high enough that you don’t qualify for a new loan or line of credit, you may need to consider bankruptcy as an option. If debt consolidation plans or debt management programs aren’t possible, consult a lawyer about pursuing bankruptcy.

Credit Score

As a rule of thumb, the lower your credit score, the higher the interest rates lenders will offer you on any kind of financing, especially when it applies to debt consolidation.

Since one of the main goals of consolidating credit card debt is to secure a lower interest rate, borrowers with below average credit scores may have difficulty qualifying for a new loan or credit card that meets that goal. In some situations, it may be advisable for the borrower to increase their credit score before applying for a debt consolidation loan or credit card.

This can be achieved by verifying your credit report, avoiding making purchases with the credit cards and making small payments toward your total balance. By improving your credit score, as well as your debt-to-income ratio, you’ll qualify for a lower rate on a debt consolidation loan or credit card.

Budget

Above all else, you should pick a credit card debt consolidation option based on the amount you can afford to pay toward your debts each month. Shop around for a loan, credit card or payment program that fits into your monthly budget, and don’t forget to factor in interest and extra fees.

For example, let’s say your monthly budget for credit card payments is $1,500 and the offered rate for a debt consolidation loan gives you a payment of $1,800 per month. In this case, you’ll either have to reevaluate your budget to find additional funding or shop around for a debt consolidation strategy with a lower monthly payment.

Final Thoughts

When your credit card debt starts to spiral, the best thing you can do is take action to stop it in its tracks. To take control over your credit card debt, come up with a plan to consolidate it in a way that fits your needs and budget.

Whether you decide to create a debt management plan with the help of a credit card counselor or apply for a balance transfer credit card, don’t waste any time getting started. If you believe a debt consolidation loan is the best solution for your credit card debt, start to achieve more by applying at Rocket Loans today.

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