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Credit cards are incredibly convenient, making it easy to spend money without carrying cash and offering perks like cash back and consumer protections. But credit card debt is also expensive. If you carry a balance on your card, you could pay high interest rates, as much as 20% or more on what you borrow.
Credit card consolidation takes your existing credit card balances, usually from multiple cards, and combines it into a single, less expensive loan. There are many loan options to consolidate your debt, which can reduce your interest rate and your monthly payment. Consider your financial situation to find the right choice for you.
7 ways to consolidate credit card debt:
- Credit card refinancing
- Use a personal loan
- Create a debt management plan
- Use a Home equity loan or HELOC
- Cash-out refinance
- Friend or family loan
- Retirement loan
1) Credit card refinancing (balance transfer credit card)
Credit card companies offer a lot of perks to convince people to sign up for their credit cards. One common perk provides a 0% introductory APR period after you open a new card. Typically, the interest-free period is between 12 and 18 months, but some 0% interest cards offer up to 24 months.
If you open a new credit card with a 0% interest promotion, you can transfer your balances to the new card. Then, you use the promotional period to pay off your debt without incurring additional interest charges.
This credit card debt consolidation plan does have its drawbacks. First, you’ll need good credit to qualify for these cards, which can be difficult if you’re carrying high balances. And many cards charge a percent of any balance that you transfer (a balance transfer fee), so you might not save as much as you expected.
Once the 0% introductory APR period ends, the card will charge its standard interest rate. If you can’t pay the balance in full during the introductory period, you’ll be left with credit card debt at a higher interest rate.
- You could pay as little as 0% credit card interest
- Balance transfer fees
- You could wind up right back where you started: with high credit card debt
- Interest-free periods are rarely longer than 1 – 2 years
Check out our list of the best balance transfer credit cards.
2) Use a personal loan
Personal loans are typically unsecured loans that you can use for almost any purpose. They’re very popular for credit card consolidation loans because they can have lower interest rates. And many lenders offer them, so you can comparison shop for the lowest rates.
Personal loans let you roll multiple credit card debts into a single payment with a fixed interest rate. But you usually need excellent credit to qualify for a personal loan with a good interest rate. Some personal lenders also charge origination fees, meaning you’ll pay an additional fee just to borrow.
- Lower interest rates
- Don’t have to provide collateral
- Requires good credit
- Lower borrowing limits than other options
3) Create a debt management plan
If you have a lot of debt, you might consider working with a third-party company that specializes in debt management. These organizations can help you create a plan to manage your existing debt and can negotiate on your behalf with lenders to reduce the amount you owe.
Typically, with a debt management company, you’ll get a single monthly payment, which can reduce the stress that debt puts on your budget. But there are several drawbacks to consider before committing to this plan.
You might agree to a plan, hoping to save money, but end up paying as much as you owed in the first place. This option can also hurt your credit score, especially if they settle your debts for less than you owe. To avoid predatory agencies that charge high fees, find a reputable option with a nonprofit credit counseling agency.
- Fixed monthly payments
- Lower interest rates than credit cards
- High fees
- Can damage your credit
Check out our list of the best debt management companies.
4) Home equity loan or HELOC
If you own a home, you can use a home equity loan or home equity line of credit (HELOC) to consolidate your debt. Your equity equals the difference between the value of your home and the remaining balance of your mortgage. Lenders may let you use that equity to secure a loan or line of credit.
Because your home serves as collateral, loans based on your home equity have low interest rates. Offering collateral also makes these loans easier to qualify for than other types of loans. Of course, using your home as collateral puts your home at risk if you fail to make your monthly payments.
When consolidating debts, a home equity loan is typically better than a HELOC. HELOCs are best for long-term, flexible access to cash. Home equity loans give you a lump sum distribution for one-time expenses, like consolidating debts.
Home equity loans and HELOCs also often involve high fees. You could also pay origination fees, closing costs, or maintenance fees if you use either of these options.
- Lower interest rates
- Larger loan amounts
- You must own your home
- Puts your home at risk
- Potentially high fees
5) Cash-out refinance (mortgage or auto)
A cash-out refinance replaces your existing loan with a new one. You use the proceeds of the new loan to pay off the old loan and can use the leftover cash for other purposes, like consolidating credit card debt. You can do a cash-out refinance with a mortgage or an auto loan, but it’s more common with mortgages.
Because you have an asset to back the loan, you typically can secure a lower rate than with unsecured debt. It may also be easier to qualify for the loan. The downside is that you’re putting the asset at risk if you fail to make payments. You also risk going underwater on your loan if the value of the asset backing the loan drops.
Another drawback of cash-out refinancing is that it extends the term of your existing loan. If you have a 30-year mortgage and have spent the past five years paying it, a cash-out refinance will push your final payoff date out by five years. It can also carry hefty fees, including origination fees and closing costs.
- Lower interest rates
- Can borrow more than you need to consolidate debt
- Long loan term
- You must own your home or car
- Puts your home or car at risk
- Extends the repayment term of your mortgage or auto loan
6) Friend or family loan
If you have a friend or a family member who has the extra money, they might be willing to help you consolidate your debts by lending you some cash.
Borrowing money from a loved one means you can pay little or no interest on the debt. It also means you’ll have a more personal incentive to repay them. However, mixing money and family or friends can be dangerous, so you should only do this if you and your loved one feel comfortable doing so.
Before you borrow money from someone you know, put together a written repayment plan that both parties agree to. Having a written payment plan can help prevent future disagreements and bad feelings.
- May have low or no interest
- You may feel a greater personal obligation to repay
- Mixing money and loved ones can be a thorny situation
- You might not have a friend or family member with the resources to help
Learn more about loans from family and friends.
7) Retirement loan
Borrowing money from your retirement account, like a 401(k), should be a last-resort solution. But if you need to consolidate your debts, it is an option that you have.
When you borrow money from your retirement account, you effectively make a loan to yourself from your 401(k) or another account, like a 403(b) or 457(b). Like a normal loan, you get a monthly bill that you need to pay and charge yourself interest. You repay the loan to restore the funds to your retirement account.
During this time, the money you borrow is out of the market, missing out on potential gains (or losses) that happen in the market. There are also potential pitfalls. For example, you must repay the full balance of your loan if you change jobs with an outstanding balance on a 401(k) loan. If you can’t, you’ll pay an early withdrawal penalty.
- You’re borrowing money from yourself, not someone else
- Won’t affect your credit
- Puts your retirement money at risk
- Potential tax penalties
- You must have the retirement savings to borrow from
Learn more about using your 401k to pay off credit card debt and see IRS rules on borrowing money from your retirement account.
Author: TJ Porter