How To Consolidate Credit Card Debt

Having multiple credit cards may initially seem like an excellent idea for purchasing everything you’ve ever wanted, but not if you can’t cover the expenses when it’s time to collect. Still, if you haven’t been paying as much attention to your finances as you should have, and racked up serious debts, don’t despair. It requires a lot of patience and a bit of loan-savvy, but we’re here to teach you how to consolidate your credit card debt and get back to a life unburdened by looming payments.

Credit card debt statistics say that the average American has three credit cards, and nearly half (47%) of American adults have credit card debt. For those who fit both those categories, one way to repay multiple debts faster is to take up credit card consolidation. While the term may sound complicated, it’s nothing more than putting your debts together into a single loan, preferably one with a lower interest rate.

We’ll now go into more detail and discuss the best credit card consolidation options to make you debt-free as soon as possible.

When Should You Rely On Debt Consolidation?

There are several situations when debt consolidation is the best way to go. One of those situations is when you manage to get a loan or new card with a lower interest rate than the one you are currently paying. High interest rates are usually to blame for difficult loan repayments, so unifying and lowering them could save you a lot of money and help you get out of debt faster.

Consolidating credit card debt is essentially an excellent solution when you have multiple debt accounts, because you have only one monthly payment to keep track of. Consolidation is a particularly fitting option for resolving credit card debt: Credit cards typically don’t have set repayment terms, which often causes debt to pile up, as the lack of structure makes it easier to avoid timely payments. By taking out a consolidation loan with a fixed repayment time, you create a payoff plan that is simpler to follow through with.

However, to ensure success with consolidating credit cards, you should be able to match the following criteria:

1. Your current debt doesn’t exceed 40% of your income.
2. You have good enough credit to qualify for a low-interest loan or even a 0% APR credit card.
3. You have sufficient cash flow to cover your debt repayments.
4. You have a solid strategy to get out of debt, and plan to use credit card consolidation as a tool toward a debt-free financial living, not another spending avenue.

If you check all the boxes above, you can use the following methods to consolidate and repay your credit card debt:

Use a Balance Transfer Card

Balance transfer cards are the best way to go about credit card debt consolidation. These cards typically have a 0% introductory APR period lasting between 12 and 18 months, throughout which you won’t have to pay any interest.

If you decide to go with this solution, you’d need to transfer all your debts to the balance transfer card, pay the transfer fee, and work on paying off the whole debt before the introductory period passes.

This solution is also sometimes known as credit card refinancing, and it may seem too good to be true. In all fairness, there are some things to be mindful of before you declare this to be your solution. First of all, you need a near-spotless credit score (at least 700) to qualify for a balance transfer card.

The next thing you should be aware of is the balance transfer fee, ranging anywhere from 3% to 5% of the amount transferred. If your debts are sizable, this could be a significant expense and might defeat the purpose of refinancing your credit card debt if you get into more debt to cover it.

Also, make sure you have a plan and can afford to pay back the debt before the introductory period is over. The APR rate that will kick in after the initial period will be on par with typical credit card rates, or even higher.

Consolidation Loans

You can also take out a personal debt consolidation loan to cover your credit card debts. If you get a type of loan where the monthly installments don’t change, and has a lower interest rate than your original debts, you’ll be all set.

If you decide to use a credit card consolidation loan to pay off your credit card debt, you should know that you can get one from a credit union or bank, as well as some online lenders.

Your credit score will be the primary factor for determining your options. If you have poor credit, then a credit union is a good choice, as they offer flexible loan terms and lower rates. The maximum APR that federal credit unions charge is 18%, but you need to be a member to enjoy these benefits.

On the other hand, people with good credit should probably head straight to the bank. Banks typically provide very competitive APRs for loans to pay off credit cards, and existing customers might be eligible for rate discounts and larger borrowing amounts.

Online lenders are an excellent solution when you are unsure whether a personal loan will help you with your credit card debt. Here, you can pre-qualify for a loan without affecting your credit score to get a preview of the loan terms, so that you can estimate whether it would be beneficial in your situation.

Home Equity, 401(k), and Other Lines of Credit

If none of the solutions mentioned above fit your idea on how to consolidate credit card debt, but you do own your home or have a 401(k) plan, you might want to consider the following options:

First off, homeowners may put their home equity to good use by taking out a loan and using it to pay back their credit card debts. This is a good solution, as a home equity loan has a fixed interest rate. Since this type of loan is secured by your house, you can expect to get lower rates than you would with other refinancing methods we’ve listed above. However, your home is the collateral, which means you’re likely to lose it if you fail to keep up with regular payments.

Another solution to consolidate credit card debt is tapping into your 401(k) plan, but this should be your last resort. Taking out a loan on employer-sponsored retirement accounts can significantly affect your retirement funds and prospects in general. If things have come this far, declaring bankruptcy instead is a very real option, and might not be as damaging.

However, if you don’t have the luxury of waiting six months for your credit score to rebound from bankruptcy, this might be the way to go. Keep in mind that the penalties and taxes for defaulting on a 401(k) loan are exorbitant, and this type of loan is commonly due in five years. If you quit or lose your job, the term shortens and you would be due the following year.

Debt Management Programs

If you can’t reduce your credit card debt with any of these “quick” solutions, you should consider hiring some help. For example, a credit counseling agency will provide you with a free debt evaluation and check whether you qualify for a debt management program based on your debts, credit, and budget.

If you do qualify, these debt settlement agencies will call your creditors and negotiate on your behalf to reduce or even waive interest charges on the remainder of what you owe. The agency will then develop a payment plan that you can afford - an excellent solution for those wondering how to consolidate credit card debt into one payment. The agency will take care of transferring the funds to your creditors to help you become debt-free.

There are also cons to this solution: Your agency obligations could last several years, during which your credit card accounts will be frozen, and you won’t be able to apply for new accounts. This long-term commitment also entails settling your monthly payments on time - with some solutions, missing even one payment could be the reason your rates go back up.

Debt Consolidation Alternatives

Debt consolidation is not the right fit for everyone, and if these ideas on how to reduce credit card debt don’t work for you, there are alternatives.

Whatever you decide to do, the first step should be assessing your current financial situation. Listing every debt you currently have, including monthly bills and other necessities, should give you an idea of how much you spend every month. Once you compare that with your current income, you’ll be able to calculate how much room you have to budget the cost of living with the debt you currently have. If you’re smart about it, you might just make it without taking out a credit card debt consolidation loan.

The Bottom Line

In the end, while you do have plenty of options to consolidate your credit card debt, it all depends on your current financial situation. Evaluate it carefully, and make sure you can afford to take these shortcuts to become debt-free.

It all boils down to planning your budget as conscientiously as possible and sticking to your spending limits. If you manage to follow that routine, you’ll be able to figure out how to consolidate credit card debt on your own without relying on any of these options.

Debt is never easy, and there are times when one of the options described above is the right solution. In that case, calculate the costs, fees, and interest rates carefully. Ultimately, keep in mind that the debt didn’t appear overnight - unless you’ve been a victim of identity theft - so it won’t disappear overnight, either. After all, none of the options you have are magical - they just ensure you keep a consistent payment schedule, which is the most important aspect of a debt-free life.