Credit card debt can feel like a major financial hurdle to overcome. Interest rates are variable and the monthly minimum payment doesn’t give you a clear picture of exactly when you’ll get out of debt.
Consolidating your credit card debt into one payment makes it easier to track your balance and payments. Plus, you may be able to pay less in interest while getting out of debt faster. Here’s how it works.
Consolidating credit card debt
Credit card consolidation uses a different type of financing to streamline multiple card balances into a single payment. You can do this in a number of ways, including through a personal loan or a balance transfer credit card.
There are several advantages to consolidating debt. Oftentimes, you may be able to qualify for a lower interest rate to help you save money as you pay off your balance. You’re also less likely to accrue late fees if you only have to remember one bill each month instead of juggling multiple due dates.
Finally, you could get a clearer picture on how much you owe altogether, how quickly you’re paying off your balance, and when you can expect to be debt-free.
When does credit card consolidation make sense
There are a number of situations in which it makes sense to consolidate your credit card debt.
- You’re paying high interest rates. At the end of 2022, the average credit card APR was 19.07%, whereas the average 24-month personal loan interest rate was just 11.23%.
- You’re regularly missing payments. Financial institutions collected $12 billion in credit card late fees in 2020, according to the Consumer Financial Protection Bureau. If you frequently miss payments and get charged a fine, you could benefit from having just one consolidated payment to remember.
- You have extra cash to put towards your balance. Commit to paying off your credit card debt by calculating how much you can reasonably put towards that balance each month. If you have that extra cash, then you may be ready for debt consolidation.
When to reconsider credit card consolidation
Credit card consolidation isn’t right for everyone. Here’s when it may not be a good idea:
- Your balance is relatively small. A credit card consolidation loan may not make sense if your balance is small. Instead, figure out how much you can direct towards paying it off each month to quickly knock out that balance.
- You regularly add to your credit card balance. If your spending outpaces your income each month and you’re still charging your card, then it doesn’t make sense to consolidate that debt. The first step is to either scale back on your spending or look for ways to earn more so you can stick to a budget. Once that’s under control, you can explore the best way to pay off your debt.
How to consolidate debt
There are several strategies you can use to consolidate debt and expedite the payoff process.
Fixed-rate debt consolidation loan
A personal loan can be used to pay off one or more credit card balances. The interest rate is fixed and payments are spread out over a set period of time, usually over one to seven years. That makes it easy to budget each month and figure out how long it will take to pay off your balance. Plus, making on-time payments for an installment loan each month can help improve your credit score.
Balance transfer credit card
A balance transfer credit card often comes with a low or even 0% introductory rate. Compare options to get the best deal and check if a transfer fee applies, since that can add to your balance. Otherwise, you could get a several-month reprieve from accruing interest on your balance.
This option works best when you’re confident you can make your payments on time and put extra cash towards your balance during that low- or zero-rate period. If you don’t pay off your card before the introductory period ends, the card’s regular APR will kick in and apply to any remaining balance.
Debt management plan
A debt management plan is created in partnership with a credit counseling agency. You’ll work with a credit counselor (typically through a not-for-profit organization) who will manage the plan and help you determine a realistic budget for your situation. They can even help negotiate with your creditors to get a lower interest rate.
Debt management plans typically last between three and five years. This option is best for people with overwhelming debt who need professional help to avoid bankruptcy.
Home equity loan
A home equity loan or line of credit could be a viable option for homeowners whose mortgage is substantially lower than their current property value. The advantage is that home equity financing typically comes with low rates because the loan is secured by your home. Just keep in mind that if you get behind on payments, you’ll risk foreclosure on your home.
With a home equity loan, you receive a single lump sum payment to use for consolidating debt, then you repay that as a second mortgage.
With a home equity line of credit (or HELOC), you can borrow from a line of credit as needed during a predetermined amount of time known as the “draw period.” It may be tempting to draw on your HELOC for purposes other than debt consolidation, so you should only consider this option if you’re confident in your ability to manage a new credit line.