Woman stressed about her credit card bills.

How To Consolidate Credit Card Debt

Sa El9-minute read
February 10, 2022

Having a few credit cards at your disposal can be life-saving – you can use them for emergencies, reward points, or to float you for 30 days if you need extra cash.

However, misusing your credit cards and their limits can land you in deep debt. In fact, the average credit card debt in a U.S. household is about $5,000.

This is where credit card consolidation comes in handy – you can get your credit card bills under control and have only one payment.

We’ll go over how to consolidate your credit card debt, why managing your debt is essential, and how to apply for a debt consolidation loan.

What Is Credit Card Debt Consolidation?

Credit card consolidation is a way of reducing your credit card debt by combining multiple credit card balances into a single, low-interest monthly payment.

The purpose of consolidating your credit card debt is to lower your overall monthly payments, save you money, and remove some of the stress that comes with high card debt.

Consolidation also makes it easier and much faster to pay off credit card debt because you’ll get to start paying off the principal (the amount you actually owe) much faster.

What Are The Best Ways To Consolidate Credit Card Debt?

There are three primary ways you can consolidate credit card debt; the option that you choose is going to depend on your specific situation.

Two of the options will require you to take out new credit to pay off your existing card balances, the other option is getting professional help. Whichever route you take, it will help in eliminating credit card debt faster.

To determine which option works best for you, consider things like your credit score, how much you owe, and how much money you will have for monthly payments.

1. Get Credit Card Counseling And A Debt Management Program

Credit card counseling is a service usually offered by nonprofit organizations from counselors who are certified and trained in money and debt management, consumer credit and budgeting. 

You should check with your local consumer protection office to prevent any possible scams.

These counselors typically will discuss your financial situation and help you come up with a personalized plan to consolidate your credit card debt or any other money issues.

Credit counselors can:

  • Assist you with creating a budget
  • Advise you on how to manage your money and debts
  • Help create a debt management plan for paying down debt
  • Offer free educational materials and workshops

Now, there are some advantages and disadvantages when it comes to dealing with a credit card counseling service.

Advantages Of Credit Counseling Services:

  • Lower Monthly Payments – You will find that your monthly payment through a debt management program is going to be lower. A lower payment makes it easier and faster to pay off your bills.

  • Calls From Collection Agencies Go Away – Getting daily calls about a late bill can stress you out and make your credit card debt situation even harder. A credit counselor should be able to get those calls stopped while you are enrolled in the program and making your arranged payments on time.

  • Lower Interest Rates – A credit counseling service will be able to help you negotiate lower payments and obtain a much lower interest rate on your overall debt.

  • Late Fees Could Be Waived – There’s no way to guarantee that a creditor will waive your late fee; however, a credit counselor could help with this.

  • Only One Payment Per Month – You only have to make one payment to the credit counseling service, which will distribute payments to each creditor on your behalf.

Disadvantages Of Consumer Credit Counseling

  • You Can’t Use Your Credit – One of the bad things about using a credit counseling company is that you have to close the account that you enroll in the program. This means you’ll be unable to use your credit while you’re in this program.

  • You Probably Won’t Be Approved For New Credit – If you have a plan to get a car or buy a home or refinance, it’s probably not going to happen while you’re enrolled in this type of program. These programs usually last up to 4 years, with the primary goal to help you get out of debt, not create more debt.

  • You Must Enroll All Eligible Debts – Even if you have cards with a good interest rate, you still have to enroll all of your accounts into the debt management program. This isn’t always a good option because having to close all your accounts will eventually hurt your average age of accounts.

2. Apply For A Balance Transfer Credit Card

When you repay an existing debt with a new credit card, it’s considered a balance transfer.

Now, these transfers don’t get rid of your current balance, it just moves from one creditor to another.

The goal of a balance transfer is to get a lower interest rate (sometimes 0%) on your money to help you pay off your balance much faster.

Almost every major credit card company will allow you to do a balance transfer. As stated above, some of them will give you 0% interest for a set amount of time.

Advantages Of A Balance Transfer Credit Card:

  • Lower Credit Utilization – One possibility is that you can decrease your overall credit utilization and help increase your score. For example: Let’s say you have one credit card with a $15,000 limit (Card A) and another card with a $5,000 limit (Card B). If you owe $4,500 on Card B, then your utilization for that card would be almost at 100%, which would hurt your score. If you did a balance transfer from Card B to Card A, this would put your utilization for Card B to 0 and put your utilization on Card A at only 30%. This is a great strategy for paying debt down faster and increasing your score.

  • Lower Interest Rate – It goes without saying, but you should never do a balance transfer to a card with a higher interest rate. The benefit of this transfer is that you are going to get a lower interest rate and be able to pay down your principal balance much faster.

  • Avoid Late Payments – If you transfer your balance at the right time, you’ll be able to avoid any late payments on your credit profile. Being even 30 days late could damage your credit, so it’s best to keep that from happening.

Disadvantages of Balance Transfers:

  • You Need Good Credit For Best Rates – Unfortunately, you’re going to need a good score to qualify for a credit card that has a 0% balance transfer introductory rate. This means you need to do a bit of forward thinking about your finances. If your score drops too low before you apply for the card, you might get a higher interest rate or be declined.

  • Balance Transfer Fees – There are also balance transfer fees that come with some of the credit cards (up to 5%) that can make the transfer pointless if you don’t pay the card off at a fast pace. If you do a transfer of $5,000 at 5%, it will cost you $250. This gives you more money to pay down, but it should be at a lower interest rate.

3. Apply For A Debt Consolidation Personal Loan

A debt consolidation loan is essentially an unsecured personal loan with a low interest rate.

When you’re applying for a personal loan, one of the options you can choose for why you need the loan is “debt consolidation.” 

Once you have been approved for the loan, you’ll use it to pay off your credit card balances.

Going this route would leave you with only the loan to pay back in monthly preset installments.

It’s also easy to apply for a personal loan online at places like Rocket Loans®, where you could get the loan approved and funded within 24 hours.

Advantages Of A Personal Loan For Debt Consolidation:

  • Only One Creditor Remains – The best thing about getting a personal loan to pay off your credit card debt is that it leaves you with only one creditor to deal with. If you had five cards with balances and you pay them off with the loan, you no longer need to manage them and will have one account with less stress.

  • Interest Rate Is Lower – The one benefit you can’t look past is obtaining a lower interest rate. Personal loans will usually have a lower interest rate than a credit card, and if you have multiple cards, your interest rates can be very different. Getting all your debt on one fixed rate is a huge benefit.

  • You Can Take Your Total Credit Card Utilization To 0% – When you take all of your revolving credit card debt and place it on a personal installment loan, it changes your credit utilization drastically. This happens because an installment loan is not counted toward your credit utilization, meaning you could go from 80% utilization to 0% instantly. You would see a drastic increase in your score and still be able to pay down your personal loan at a lower interest rate.

Disadvantages Of Getting A Personal Loan:

  • Origination Fees – Fees associated with getting a personal loan are known as origination fees. They can range from 1% – 8% of the total loan amount. You should factor this into how much the loan is going to cost you in regard to paying it back.

  • You Need A Good Credit Score – Since you’ll have to apply for this personal loan, you’re going to need a good score to qualify. Again, you need to pay attention to your credit and take control of your debt before it starts hurting your score.

  • Hard Credit Inquiry – You will probably get a hard credit inquiry when you apply for the loan, which means you’ll probably see your credit score drop a few points.

Are There Other Options For Credit Card Consolidation?

You have some alternatives when it comes to consolidating credit card debt. Some are super risky.

It’s never a good idea to take out a secured loan for unsecured debt, so be very cautious when considering the below options:

Home Equity Loan

Think of a home equity loan as a second mortgage; you take out the amount you want to borrow in a lump sum and pay it back over a 5 – 15 year time period.

The amount you can borrow is based on the current value of your home minus what you owe on the mortgage. 

For example, let’s say your home is currently worth $250,000, but you only owe $200,000 on the mortgage; you could potentially borrow up to $50,000 in a home equity loan.

There are some advantages and substantial disadvantages of using this method.

Advantages Of A Home Equity Loan For Debt Consolidation:

  • You Can Pay Off Larger Amount Of Debt – Outside of being able to pay off a larger amount of debt, there doesn’t seem to be any additional benefit of choosing this route to clear your credit card debt.

Disadvantages Of A Home Equity Loan For Credit Card Debt:

  • A Second Mortgage – If you take out a loan on your home for credit card debt, you’re going to have a second mortgage. This means two monthly mortgage payments instead of one payment.

  • Foreclosure – The worst thing that could happen is foreclosure because you couldn’t keep up with two mortgage payments. This risk seems too high of a cost to clear credit card debt.

  • Higher Rate Than Primary Mortgage – This could backfire because your interest rate will be higher on your second mortgage than your primary mortgage, costing you more money over time than it would have by just paying off your cards without the home equity loan.

401(k) Savings

If you take any money from your 401(k) before you reach age 59½, the IRS is going to charge you a 10% early withdrawal penalty fee.

Since these funds come from your pretax income, you’ll also have to pay taxes on any amount you take out.

Now, if your employer has a hardship distribution plan, you could avoid those fees for specific hardships; however, debt consolidation isn’t one of them.

There doesn’t seem to be an advantage to using a 401(k) to pay off credit card debt, so below are only the disadvantages.

Disadvantages Of Using Your 401(k) Savings Plan:

  • Fees And Taxes – As stated above, along with paying taxes, you’ll also pay a penalty if you’re younger than 59½ years old. There is no reason to choose this route for paying off credit card bills.

  • Decrease In Retirement Savings – One of the worst things you can do when it comes to borrowing money is to have it affect your retirement savings. This method will not only decrease your savings but increase fees you’d have to pay.

Taking Action

When your credit card debt becomes unmanageable, consolidating that debt is going to be the fastest way to take control and ease your stress.

Your main goal for any credit card consolidation should be to reduce costs and simplify your finances. If your plan doesn’t include both of those factors, it probably isn’t a great plan.

Figuring out the best way to consolidate your debt will be entirely up to you, but whatever you do, don’t waste any more time thinking about it.

Chose the way that benefits you the most financially and try your best to eliminate your credit card debt.

Sa El

Sa El is the Co-Founder of Simply Insurance & Credit Knocks. Along with being a licensed real estate agent, he is also a licensed Insurance Agent with over 11 years of experience in the industry. He is an entrepreneur, insurance educator, and freelance writer.