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How to Consolidate Credit Card Debt

Last updated 03/19/2024 by

Julie Bawden-Davis
Consolidating your credit card debt can be a smart move if you can get a lower interest rate than what you’re currently paying across your debts. When done right, it can reduce interest costs, lower your monthly payment, or help you get out of debt faster.
Credit Card Balance in U.S (Source)
If you’re scrambling to pay your credit card bills each month and juggling payments is becoming increasingly difficult, credit card debt consolidation may be an effective solution to your money woes.
According to data from Experian, outstanding credit card debt in the U.S. in 2020 was $756 billion. Credit cards are by far the most popular source of credit. Two out of every three loan products are credit card accounts. Unfortunately, 66% of credit card accounts carry a balance. It’s no surprise that millions of Americans are struggling to keep their credit card debt under control.

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What is credit card debt consolidation?

Debt consolidation is not a one-size-fits-all approach, however, nor is it a silver bullet. There are several factors to consider when you’re thinking about debt consolidation, including your credit score, amount of debt, and what kind of payments you can afford, given your individual budget.

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If not used correctly, credit card debt consolidation can make a burdensome debt situation worse, so before signing on the dotted line, you’ll want to investigate your options. Consider the pros and cons of different methods of debt consolidation, and whether they will affect your credit rating.
How does debt consolidation work?

Credit card debt consolidation options

You may have heard of the Debt Snowball Method and Debt Avalanche Method to pay off your debt. These are widely considered to be smart, effective strategies to help pay down your debt when you’re juggling multiple accounts,and can be used in combination with other strategies to get troublesome debt under control.
Sometimes, however, the sheer number of credit card accounts you’re trying to manage can seem like it’s swallowing you whole and sucking up all your of time. In situations like this, consolidating credit card debt makes a lot of sense.
There are various ways to consolidate credit card debt. Each option has its benefits and drawbacks.

Balance Transfer

A balance transfer takes advantage of the lower interest rate of another credit card or one with a 0% annual percentage rate (APR) introductory promotional period. You transfer the balance from one or more credit cards with higher interest to the lower interest card, then continue to pay down the debt while saving money on interest. Here are some balance transfer cards to consider.

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Personal Consolidation Loan

A personal consolidation loan is simply a personal loan from a bank, credit union, or reputable online lender borrowed at a favorable interest rate that is lower than what you are paying on your credit cards. You use the loan amount to pay off the credit card debt in one go, then continue to pay off the personal loan.

Debt Management Plan

A Debt Management Plan or Debt Management Program is sometimes recommended by a credit counselor when you’re dealing with oppressive debts and multiple accounts and are having trouble getting them under control through budgeting and other means. The credit counseling organization you choose will deal with your creditors and negotiate repayment terms that will allow you to affordably pay off your debt in a predetermined amount of time.

Home Equity Line of Credit

If you own a home and have built up some equity, a HELOC may be a solution for consolidating credit card debt and paying it off. Such credit lines allow you to draw money from your home’s equity.
The decision to take out a HELOC should be made with extreme caution and full knowledge of the risk you’re assuming by using your home to secure your credit card debt.

Balance transfer with no interest rate

Refinancing with a balance transfer credit card can be a terrific way to consolidate credit card debt, especially if you have good to excellent credit (690 or higher) and limited debt. With this option, the borrower transfers credit card debt to a balance transfer card with a limited-time promotional period at no interest. Typical zero-interest promotional periods are 12-18 months, though depending on your credit score, you may be able to get even longer.
Ideally, you would pay off the entire balance interest-free before the introductory promotional period ends. Interest rates jump to standard APRs once the promotional period is up, which can be high, and any remaining balance will be charged at this interest rate.
If you qualify for a balance transfer credit card, you will likely pay a one-time balance transfer fee of 3% to 5% of the amount transferred, and in some cases, a fee is charged per transfer (usually $3-$5). However, good balance transfer credit cards don’t charge annual fees.
If you don’t qualify for a 0% APR balance transfer credit card, you can still employ this method with a new or existing lower-interest card. In either case, you’ll need to do the math to make sure the balance transfer fee doesn’t wipe out your interest savings.
Also, since balance transfers don’t have specific repayment terms laid out, it will be up to you to calculate how much you’ll have to pay each month to pay off the balance before the regular APR kicks in at the end of the promo period. If you only make the monthly minimum payment, you’ll most likely still have a hefty balance left over when that time comes.
Lastly, don’t be late with those payments! It might cancel the introductory 0% APR offer, and you’ll be back in the same old boat paying high interest on your debts.
Take advantage of Supermoney’s tool to shop for the best balance transfer credit cards.
This option works best if you:
  • Have a good credit score (690+).
  • Have a stable, healthy income.
  • The balance transfer credit limit is high enough to allow you to pay off the entire amount you owe on credit cards.
  • You have a low debt-to-income ratio (43% or less), and you owe less than $10,000 in debt.
  • The new card’s interest rate is lower than the average rate of the cards you wish to pay off. (This will save you money each month and offset the balance transfer fees.)
  • You can exercise financial restraint and not use the cards that you pay off.
Effect of low-interest/no-interest credit card balance transfer on your credit score: Neutral or positive.

Consolidate with a personal loan

A debt consolidation loan–a personal loan featuring a fixed interest rate and a specified repayment term–can be another excellent option for paying off your credit card debt. By using the loan funds to knock out all your credit card balances in one fell swoop, you’ll eliminate the headache of dealing with multiple bills, due dates, and interest rates. Instead, you will have one fixed monthly payment.
Personal loans are advantageous in that they offer flexible repayment terms, usually between three and five years, so you can select the one that works for you. A longer repayment term means you’ll make lower monthly payments but pay more in interest overall. A shorter loan term will reduce interest costs but require higher monthly payments. Saving the most money, in the long run, is ideal, but obviously, you’ll want to choose a loan term with monthly payments you can afford. There’s no good in overextending yourself and defaulting on the loan.
There are other potential advantages of personal loans: for one, some lenders offer to pay your creditors directly with the funds, eliminating another step for you to worry about. Also, some lenders allow you to prequalify for a loan. This means you can check your rates and available loan amounts without a hard pull on your credit report, which could ding your credit score.
You can get debt consolidation loans from banks, credit unions, or online lenders. Credit unions often offer the lowest rates–in fact, federal credit unions can’t charge more than 18%–but you’ll need to be a member to qualify for their personal loans.
Online lenders also offer low interest rates, but rates can vary dramatically, ranging from less than 10% to more than 36%, depending on the lender and your particular credit situation. Shopping around for the best personal loan offers is crucial.
When comparing rates, make sure you understand all the terms and read your loan disclosure’s small print. You may have to pay an origination fee for the loan, which can put a dent in the overall savings of a consolidation loan. Also find out if there are penalties for early repayment. If not, you could put your tax return or work bonus towards paying off the loan early and increase your savings.
This option works best if you:
  • Have a good credit score (670+)
  • Enjoy a stable, healthy income.
  • Have a low debt-to-income ratio (43% or less).
  • Can qualify for a loan interest rate that is lower than the average interest rate of the cards you wish to pay off.
  • Owe less than $10,000 on credit cards.
Effect of personal loan on your credit score: Neutral or positive.

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Debt management plan

Credit counseling agencies are non-profit organizations that provide debt and money management advice. When you enlist the help of a credit counseling agency, a credit counselor will review your financial situation at no cost and help develop a personalized plan to tackle your credit card debt. Sometimes, the counselor’s recommendation may be that you enroll in a debt management plan, also known as a DMP.
A debt management plan is a very sensible option for people who are unable to consolidate credit card debt on their own, either because of low credit scores or too much debt, and need professional assistance.
Your credit counselor acts as your advocate in a debt management plan. After reviewing your debts, credit, and budget, he will help you figure out a payment that works for you. The team of credit counselors then call your creditors to negotiate an affordable repayment plan on your behalf, with the goal of working out lower interest rates and monthly payments, stopping penalties, and sometimes even getting some of your debt forgiven.
Once your creditors agree to the DMP, you’ll begin making one monthly payment to the credit counseling agency, and it will then distribute payment to your creditors for you. By rolling your credit card debts into a single monthly payment at a reduced interest rate and removing the stress of trying to manage your debt by yourself, a debt management plan can be just the lifesaver you need when you’re drowning.
You will repay the full amount of your debt in a DMP, which typically lasts three to five years. You will likely also pay a small monthly service fee, which is rolled into your regular monthly payment. Credit counseling organization fees have a nationwide cap of $79, and are set by state regulation.
Lastly, participation in a DMP is not harmful to your credit score.
When exploring this option, keep in mind that reputable credit counseling organizations are generally certified and accredited by the National Foundation for Credit Counseling.
This option works best if you:
  • Feel overwhelmed by the various options for debt consolidation and want some guidance.
  • Are willing and able to follow a credit counselor’s advice about your managing your debt.
  • Owe more than $10,000 in credit card debt.
  • Don’t have enough income to cover your current required minimum credit card payments, and you are behind in making payments.
  • Your credit is already damaged, or damage is imminent.
Effect of credit counseling on your credit score: Usually neutral.

Home equity loan or line of credit

Home equity loans may be a tempting way to consolidate and pay off out-of-control credit card debt because they are one of the least expensive sources of credit available, but you’ll want to approach this option with caution.
The reason home equity loans and home equity lines of credit (HELOCs) charge such lower interest rates than personal loans is because they’re secured by your house as collateral. This means that if you default on a HELOC, the lender could initiate foreclosure proceedings on your home. Because your house is collateral, it is also easier to qualify for HELOCs than other types of unsecured personal loans, even if your credit is mediocre or poor.
If you’re a homeowner with enough equity built up to take out a home equity loan or line of credit, talk to your mortgage lender and get the full rundown on closing costs, etc., as these can be expensive. A home equity loan is generally disbursed in a lump sum and is charged a fixed interest rate, while a HELOC is usually charged a variable interest rate, so investigate which type makes the most sense for you before making a decision.
Tap into the equity you’ve accrued in your home only if you’re absolutely certain you’ll be able to pay off the loan in full and on time. Consult your budget to make sure you’ll be able to afford the new monthly payments comfortably for the life of the loan, typically up to 20 years.
If you are so deep in debt that you’re considering a HELOC to remedy it, you would most likely be betteconsideringnsider a debt management plan instead. Considering the risk of losing your home if you default on the loan, it very rarely makes sense to pay off unsecured debt with secured debt in this way.
This option works best if you:
  • Can qualify for a lower rate than the average interest rate of the credit cards you’re paying off.
  • Are able to get a credit line that is enough to pay off your credit cards.
  • Have a good credit score (690+), and your credit report reflects that you pay your bills on time.
  • ave the discipline and ability to stop using credit cards, and put the money you save toward paying off the credit line.
  • Are aware that a HELOC uses your home as collateral. If you fail to pay, you risk losing your home.
Effect of a HELOC on your credit score: Neutral or positive.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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When consolidation is not an option

Debt settlement

If you’ve consulted with credit counselors and explored all debt consolidation possibilities but you find yourself in a situation where it is simply impossible to pay off your credit card debt, you need to know what your options are. Debt relief services offer an alternative that can help you get rid of your debts, but it is not the same thing as the more traditional and vastly preferable debt consolidation methods described above, and should only be given thought as a very last resort.
First, you should know that debt settlement companies are for-profit organizations which can frequently be unscrupulous and predatory towards people in a highly vulnerable, stressful debt situation. They can be known to charge outrageous fees and sometimes demand upfront payment. If you come across such companies while exploring this option, don’t give them a second thought.
Unlike what happens when you enter into a DMP, when you enter the debt settlement process, you are advised to cease paying your creditors altogether. The debt relief agency then negotiates with them, with the goal of reaching an agreement to accept repayment for an amount that is less than what you owe.
To pay the settlement amount reached, you put money each month into an escrow savings account managed by the debt relief company. This savings process usually takes 24 to 36 months. Once the account has enough funds, they are used to make a lump-sum payment for the negotiated remainder of what you owe.
Because you are making no payments on your credit card balances or unsecured personal loans during the time that you are saving toward a lump-sum payment, your credit score is negatively impacted. In fact, the use of debt relief services usually hurts credit scores by 100 points, and it leaves a 7-year mark on your credit history.
If you decide this may be your only option without resorting to bankruptcy, use Supermoney’s tool to choose a vetted, reliable debt relief company and minimize the risk of being taken advantage of.

This option works best if your:

  • Income isn’t enough to cover the minimum monthly payment on your credit card balances, and you are behind in making payments.
  • Credit is already damaged, and you’re willing to let it drop further.
  • Overall credit card debt is higher than $10,000.

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Effect of debt relief on your credit score: Negative.

File for bankruptcy

If your credit card debt has become truly insurmountable, you may need to consider filing for bankruptcy. This is the least desirable way to escape intractable debts, and damages your credit enormously.
There are two types of consumer bankruptcy. Chapter 7 bankruptcy is the most common and washes away most of your unsecured debts, with some exceptions such as student loans and tax obligations. However, all of your nonexempt assets are subject to seizure and sale for the purpose of partially repaying what is owed to your lenders. A chapter 13 bankruptcy obligates you to participate in a repayment plan over a period of three to five years to either partially or fully satisfy your debts. A chapter 7 bankruptcy remains on your credit history for 10 years, while a chapter 13 bankruptcy remains on your credit history for 7 years.
If your debt is more than 40% of your income and cannot be repaid within five years, then bankruptcy may be a necessary option.

This option works best if:

  • You owe more than half your gross income and show payment hardship.
  • You won’t be able to pay off your credit card debt within five years.
  • You’re willing to accept having a bankruptcy on your credit report.
Effect of Chapter 13 bankruptcy on your credit score: Negative.

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Want help determining which debt consolidation option is right for you? Contact SuperMoney’s experts on Debt Help.

Julie Bawden-Davis

Julie Bawden-Davis is a widely published journalist specializing in personal finance and small business. She has written 10 books and more than 2,500 articles for a wide variety of national and international publications, including, where she has a weekly column. In addition to contributing to SuperMoney, her work has appeared in publications such as American Express OPEN Forum, The Hartford and Forbes.

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