How To Consolidate Credit Card Debt

Credit card consolidation can offer a path to relief from the financial whack-a-mole of managing multiple high-interest revolving balances simultaneously.

Keep reading to learn how combining several variable-rate debts into one predictable monthly payment with better terms can help you budget more precisely, dedicate more of your money to paying off your debt and ease the financial strain that comes with juggling more than one high credit card balance month after month.

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Key Takeaways

• Consolidation combines balances into one payment. The goal is a single, predictable monthly payment — ideally at a lower interest rate than your current cards.

• Three main paths exist. Balance transfer cards, personal loans and home equity products (loans or HELOCs) are the most common ways to consolidate.

• The right fit depends on you. Your credit score, total debt, income and whether you own a home all shape which option, if any, makes sense.

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3 Ways To Consolidate Credit Card Debt

There are three primary avenues to traditional debt consolidation, each with its own benefits, drawbacks and considerations. 

1. Balance Transfer Credit Cards

Many lenders offer balance transfer credit cards with special 0% introductory APRs, which can give you 12, 18 or even 21 months of breathing room.

By transferring one or more active balances to a card like Wells Fargo Reflect or Bank Americard, you can stop the bleeding from 20%-plus interest rates for nearly two years while you save money, pay down other debts and improve your overall financial profile.

However, when the introductory period ends, you’re on the hook for the full balance at the card’s standard APR.

2. Personal Loans

St. Louis Federal Reserve data show that today’s average APR of 11.4% for unsecured personal loans is relatively low by historical standards. It won’t let you dodge a year or more of interest payments like a balance transfer card, but the rate nearly halves the 21% that the same institution cites as the current average credit card APR — and you’re not just kicking the can down the road with a personal loan. When you pay off the loan, the debts you consolidated are gone for good.

With terms ranging from 12 to 84 months, personal loans lock in fixed monthly payments that never change and improve your credit through steady principal reduction, a record of on-time payments and the addition of a new type of account to your credit mix. 

3. HELOCs and Home Equity Loans

Homeowners can borrow against their property in two ways.

• Home equity loans are similar to personal loans in that they have fixed rates and predictable monthly payments for a set term. However, they’re much cheaper — lenders like SoFi offer rates around 7.29%. 

• Home equity lines of credit (HELOCs) have similar APRs to home equity loans, but they charge variable interest rates that can and do change with market conditions. Unlike home equity and personal loans, which pay lump sums, HELOCs extend credit lines that you tap and repay as needed. 

Personal loans are more expensive than borrowing against home equity because they are unsecured, so the lender assumes more risk. Home equity loans are cheaper, but far riskier because your house is your collateral — default on the loan and you could lose your home.

Is Debt Consolidation Right for You?

Debt consolidation can be a powerful weapon in your war against credit card debt, but there are pros and cons to consider, and your specific situation might be better remedied through alternative strategies.

Your answers to the following questions can help you make the right choice. 

• Is your debt manageable? Debt consolidation is best for those whose combined debt, not counting a mortgage, is under 50% of their gross monthly income. 

• Do you have a good credit score? Debt consolidation requires more borrowing, which usually isn’t possible, at least not at a good rate, without a score of at least 580. 

• Does the math add up? Will the term and interest rate on your consolidation loan or line of credit, and the combined APR including fees, put you in a better position? 

• What’s your plan? If you don’t have a strategy for spending and saving to manage your newly revised debt relative to your income and lifestyle, you could wind up right back where you started or worse.

Alternatives To Consolidating Credit Card Debt

If your answers to the previous questions suggest you should pursue a different route, consider these alternatives to traditional credit card debt consolidation. 

• Margin loans: If you have a taxable brokerage account, you might be eligible for margin lending, which allows you to borrow against your holdings at a favorable rate with no credit check, flexible repayment terms and a favorable interest rate. However, your securities are held as collateral, and a margin call could trigger a request for immediate repayment. 

• Peer-To-Peer lending: Crowdfunding platforms or p2p lenders might work with you even if traditional banks won’t, but if your credit is blemished, prepare to pay rates that might make consolidation even more expensive than your current debt. 

• Borrowing from friends and family: Money can strain relationships, so be mindful when borrowing from a friend or family member if they are able and willing to help, and treat the debt as seriously as you would if it came from a bank.

FAQ

You’re probably asking many of the same questions as others who are considering debt consolidation. These answers can offer clarity. 

What is credit card debt consolidation? 

The strategy entails combining — or consolidating — multiple credit card balances into a single monthly payment. There are several paths, but all involve taking out a new loan with more favorable terms to pay off your existing high-interest debts.

How does consolidating credit card bills reduce debt?

Debt consolidation can make monthly payments more manageable with a flat-rate loan with fixed payments, or balance-transfer credit cards that don't charge interest for a limited period, while reducing long-term financing charges.

Can I continue to use my cards after I consolidate? 

Yes, but that doesn’t mean it’s a good idea. If you’re amassing new credit card debt while paying a consolidation loan to eliminate existing balances, you’ll find yourself in the same situation before too long. If you use your card to leverage rewards, charge only as much as you can afford to pay in full each month. 

Will debt consolidation hurt my credit score? 

Just applying for a loan or balance transfer card can temporarily and modestly ding your score because of the hard pull it entails. After that, your score could drop a bit further as a new debt appears on your report. Soon, however, your credit utilization ratio will improve as your credit card balances fall, and your on-time payments and steadily receding debt will grow your score over time.

What is the best way to consolidate? 

The best method varies by borrower. For example, property owners might be best served by tapping their home equity, while investors might want to keep the new loan off their reports by borrowing against their securities on margin. Those whose scores are still high might choose to freeze their interest payments with a balance transfer card. 

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Key Terms

• Debt consolidation: Combining multiple debts into one loan or payment, ideally at a lower overall interest rate.

• Balance transfer card: A credit card with a low or 0% introductory APR that lets you move existing balances and pay down principal during the promo period.

• Balance transfer fee: A one-time charge to move a balance, typically 3% to 5% of the amount transferred.

• Personal loan: An unsecured installment loan with fixed payments over a set term, often used to consolidate higher-rate debt.

• Home equity loan: A fixed-rate loan secured by your home equity, paid out as a lump sum.

• HELOC (home equity line of credit): A revolving, usually variable-rate line of credit secured by your home that you draw on as needed.

• Origination fee: A one-time lender charge for processing a loan, often a percentage of the amount borrowed.

• Margin call: A lender's demand for immediate repayment or more collateral when securities backing a margin loan fall in value.

Sources

• FRED — Finance Rate on Personal Loans at Commercial Banks, 24-Month Loan

• FRED — Commercial Bank Interest Rate on Credit Card Plans, All Accounts

• CFPB — What do I need to know if I'm thinking about consolidating my credit card debt?

• FTC — How To Get Out of Debt

Summary generated by AI, verified by MoneyLion editors