7 Ways To Consolidate Credit Card Debt (2024)

Credit cards are an excellent tool for earning rewards like cash back or miles for travel. They provide an emergency source of cash and can help lay the foundation of credit building to make way for future purchases such as a car or home.

But sometimes life happens and before you know it you’re stuck with multiple credit cards with varying balances. Planning and executing a strategy to pay down these debts can be daunting, but it is achievable.

With multiple methods to consolidate and pay down these debts, the best strategy may differ from person to person. Today, we explore some common and uncommon ways you can approach consolidating your debts.

What Is Credit Card Consolidation?

Credit card consolidation is a strategy in which multiple credit card balances combine into one balance. This makes it easier to track since there is just one monthly payment and due date to be concerned with. These consolidation strategies often come with a lower APR that will save on total interest paid, allowing you to pay off the balance quicker.

What Is a Credit Card Debt Consolidation Loan?

Credit card consolidation loans occur when a new loan is taken out to pay down your existing debts. For simplicity, let’s say you have three credit cards with balances of $1,000 each. A consolidation loan would be taking out a loan for $3,000, paying off your three $1,000 balance credit cards and now just having a singular loan for $3,000.

How Does Credit Card Consolidation Work?

The credit card consolidation process is generally straightforward. Working with a loan officer, credit counselor or on your own, you gather all the debts you want to combine into one payment. From there, a plan or loan is set in place for you to make your monthly payment to one location, making it easier to remember your due date, along with hopefully having a lower APR to pay overall.

With this in mind, let’s cover some consolidation strategies that may be accessible by you. By no means is this a complete list but it may offer some ideas you may not have considered before.

How To Consolidate Credit Card Debt

You can consolidate credit card debt using several methods, but among the most popular are personal loans, debt consolidation programs and, perhaps easiest and often cheapest, 0% introductory APR offers from balance transfer credit cards.

Personal Loans

One of the most common ways to consolidate your credit card debts is to reach out to your local bank or credit union and request a personal loan. The application processes can often be completed over the phone or online. What’s great about these loans is that they often offer flexible terms (typically 12 to 60 months) and establish a consistent month-to-month payment due, which assists in budgeting. As a bonus, some financial institutions will make a payment directly to the creditors, saving you the hassle.

Do be aware that your interest rate is likely determined by the term of the loan and your credit score. Loans may also be subject to origination fees, which add to the overall cost of the loan.

Often the four big metrics used in lending are income, credit score, total assets and total debts. Some underwriters, like online lender Upstart, add in a few nontraditional metrics in their loan approval process. During the underwriting process, metrics such as educational level, length at current residence and even job history can lead to an approval where a bank may not have. This is especially useful for newer borrowers who may not have a robust credit profile established.

There are a few drawbacks, such as the potential for origination fees and fewer loan terms to choose from. Rates are comparable for those with a good credit score but could be much higher if your credit score is unfavorable.

Debt Consolidation Programs

A debt consolidation program is usually a service for borrowers where your credit cards are combined into a single payment. From there, you usually make a single payment to the program which would then forward the payment to your creditors. Do not confuse this with a debt consolidation loan, where a loan is granted that pays off your existing debts. Your existing debts are still there but may be more manageable.

Ideally, your program’s monthly payment is less per month than making all of your payments individually. That also means that more of the payment goes towards paying down your existing debts. Debt consolidation programs work with your creditors to help reduce interest rates on debts and eliminate varying fees such as late fees, though neither is promised. Some debt consolidation programs may require the closure of some or all of the cards that you are consolidating, so be sure to double check if your goal is to keep your cards.

If you’re looking for help overcoming debt repayment challenges impacting your credit, nonprofit credit counseling organizations, like the National Foundation for Credit Counseling (NFCC), can pull your report and score at no cost and review the results with you. Keep in mind while all of these programs’ ultimate goal is to create a payment plan that works for you, some do carry varying setup or monthly fees. This should be factored into your decision of which company you go with.

0% APR Offers on Credit Cards

Many credit cards offer an introductory offer of 0% APR on balance transfers for a limited amount of time after opening the card. While they still may be subject to balance transfer fees (typically 3% to 5% of the balance being consolidated), they often offer 0% introductory periods between twelve and eighteen months to not worry about the balance accruing any additional interest.

The Citi® Diamond Preferred® Card, for example, is an excellent option for those considering taking this route. It comes with a $0 annual fee and a respectable 0% intro APR for 21 months on eligible balance transfers from date of first transfer and 0% intro APR for 12 months on purchases from date of account opening. After that, the variable APR will be 18.24% - 28.99%. Balance transfers must be completed within 4 months of account opening. A balance transfer fee of either $5 or 5% of the amount of each transfer, whichever is greater, applies.

The downsides to balance transfer credit cards are the credit limit given and being limited to only the intro period before interest starts to accrue. For some people, spreading payments over a longer time period may be more beneficial, even if it requires paying some interest. It’s recommended that you have good to excellent credit if you’re considering applying for a credit card that offers a 0% introductory period.

Second Mortgage or HELOC

If your home has appreciated in value over time or the balance has been paid down a fair amount, using your home could be a way to consolidate your debts. Taking out a second mortgage or using a home equity line of credit (HELOC) is effectively using your home as collateral in order to pay off other debts.

Since there is an underlying asset for these loans, the rate is often lower than what you would get with a personal loan, making either the monthly payments smaller or avoiding higher interest rates with other methods. The lower interest rate may give you the ability to pay down the balance more quickly. There could be additional mortgage-related expenses when taking this route, so a direct inquiry to your lender is a must. There may be tax implications as well.

401(k) Loan

We typically do not recommend taking money from retirement savings in all but the most urgent circ*mstances. Ideally, a 401(k) loan would not be your first choice for debt consolidation—that said, it does offer a few advantages.

Taking out a loan against your employer-sponsored 401(k) is a way of getting a lower rate than a personal loan, and generally, this strategy can help your overall credit profile. Taking out a loan from your own 401(k) doesn’t require a credit check, so it shouldn’t affect your credit score or require credit of any specific level. Meanwhile, the debts you pay off with the loan may help improve your credit rating over time.

Just understand that leveraging your 401(k) reduces your retirement fund and hefty fees may be assessed if you’re unable to pay back the loan. The payback time may also be accelerated if you were to lose or change jobs.

Peer-to-Peer Lending

Peer-to-peer lending is another way to access funds for a consolidation loan. Peerform, a marketplace lending platform, brings together those seeking loans with those willing to invest. The idea is to create a “win-win” situation. The borrowing to consolidate debts into one easy monthly payment and an investor seeking a steady and worthwhile return on investment.

Equity in Owned Vehicles

If you have a vehicle that is paid off or has a low balance in comparison to what it is worth, this could be an interesting route to take. Taking a loan out using your vehicle as collateral, would allow you to pay down your other creditors. In this situation, you gain the ability to receive an auto loan rate which is typically much lower than an unsecured personal loan.

The downside here would be a limitation of the loan being capped at the value of the vehicle. Also, when carrying an auto loan, most lenders require full auto insurance coverage on the vehicle, which could increase the monthly expenses if usually carrying personal liability and property damage (PLPD) insurance. That said, this is another way to leverage an asset to obtain a lower loan rate.

Is Credit Card Debt Consolidation a Good Idea?

The goal of credit card debt consolidation usually is to roll your high-interest credit card debts into one easy payment with a lower interest rate. If anything else, it provides a clear path to getting debt-free as the terms tend to have a fixed paydown period. This more structured feel may be exactly what you need to be on your way to being debt-free, even if there are some setup or origination fees.

What Is the Difference Between Debt Consolidation and Credit Card Refinancing?

Credit card refinancing is transferring the balance of a credit card onto a lower interest rate credit card. In other words, credit card refinancing is another way of saying balance transfers. There are a few things to bear in mind when considering one over another.

Credit card refinancing works best when you’re dealing with lower overall balances. This is because when you refinance, you usually get a promotional lower APR for a shorter period of time (usually 12 to 18 months). After this period, the APR may be similar to what you were paying prior to refinancing. What is nice is that you’ll only be responsible for the minimum payment each month, which would likely be smaller versus a consolidation loan. You would be advised to aim to pay off the balance during the promotional period, making this a more short-term solution.

A consolidation loan would come with a fixed rate, consistent month-to-month payment and a defined maturity date of the loan. While there may be an origination fee, all of the guesswork is taken out as everything is determined at the time the loan is taken out. The rate would likely be higher than a promotional rate from a credit card, but if the balance is being carried beyond this time period, the consolidation loan rate would likely be less than the average APR from the credit card.

Bottom Line

Credit cards and their associated rewards programs can be amazing for earning and saving up for that next vacation or just putting a little extra back into your pocket. However, getting over your head in credit card debt can be exhausting and quickly negate the value of all of the points, miles and cash back you’ve ever earned. Exploring options to eliminate this debt quickly can go a long way to gain financial freedom and get you back to leveraging your credit cards effectively.

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