Credit card debt consolidation is a strategy that takes multiple credit card balances and combines them into one monthly payment.
Consolidation of your debts is ideal if the new debt has a lower annual percentage rate than your credit cards. This can reduce interest charges, make your payments more manageable, or shorten the repayment period.
The best way to consolidate will depend on how much debt you have, your credit score, and other factors.
Here are the five most effective ways to pay off credit card debt:
Refinance with a balance transfer credit card.
Consolidate with a personal loan.
Start a debt management plan.
1. Balance Transfer Card
0% APR introductory period.
Requires good to excellent credit to qualify.
Usually has a balance transfer fee.
A higher APR kicks in after the introductory period.
Also called credit card refinancing, this option transfers credit card debt to a balance transfer interest-free credit card for a promotional period, often 12 to 18 months. You’ll need good to excellent credit (690 or higher on the FICO scale) to qualify for most balance transfer cards.
A good balance transfer card won’t charge an annual fee, but many issuers charge a one-time balance transfer fee of 3% to 5% of the amount transferred. Before choosing a card, calculate whether the interest you save over time will wipe out the cost of fees.
Try to fully pay off your balance before the end of the 0% APR intro period. Any remaining balance after this date will have a regular credit card interest rate.
2. Credit Card Consolidation Loan
A fixed interest rate means your monthly payment won’t change.
Low APR for good to excellent credit.
Direct payment to creditors offered by some lenders.
It’s hard to get a low rate with bad credit.
Some loans have origination fees.
Credit unions must be members to apply.
You can use an unsecured personal loan from a credit union, bank, or online lender to consolidate credit card or other types of debt. Ideally, the loan will give you a lower APR on your debt.
credit unions are non-profit lenders who can offer their members more flexible loan terms and lower rates than online lenders, especially for borrowers with fair or poor credit (689 or less on the FICO scale ). The maximum APR charged to federal credit unions is 18%.
Bank loans offer competitive APRs for borrowers with good credit, and benefits for existing bank customers can include larger loan amounts and rate reductions.
Most online lenders allow you to prequalify for a credit card consolidation loan without affecting your credit score, although this feature is less common with banks and credit unions. Pre-qualification gives you a preview of the rate, loan amount and term you could get once you officially apply.
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Look for lenders that offer special features for debt consolidation. Some lenders, like Pay, specialize in credit card debt consolidation. Others, like Discoversend the loan funds directly to your creditors, simplifying the process.
Not sure if a personal loan is the right choice? Use our Debt Consolidation Calculator to enter all your debts in one place, see typical lender rates, and calculate the savings.
3. Home equity loan or line of credit
Lower interest rates than personal loans.
May not require good credit to qualify.
The long repayment period keeps payments lower.
You need the equity in your home to qualify, and a home appraisal is usually required.
Secured with your home, which you can lose in case of default.
If you’re a homeowner, you may be able to take out a loan or line of credit against your home equity and use it to pay off credit cards or other debts.
A home equity loan is a lump sum loan with a fixed interest rate, while a line of credit works like a credit card with a variable interest rate.
A HELOC often requires interest-only payments during the drawdown period, which is usually the first 10 years. This means that you will have to pay more than the minimum payment due to reduce the principal and reduce your overall debt during this period.
Since the loans are secured by your home, you’ll likely get a lower rate than you’d get on a personal loan or balance transfer credit card. However, you can also lose your home if you don’t meet the payments.
4. 401(k) loan
Lower interest rates than unsecured loans.
No impact on your credit score.
It can reduce your retirement fund.
Heavy penalty and fees if you cannot repay.
If you lose or quit your job, you may need to pay off your loan quickly.
If you have an employer-sponsored retirement account like a 401(k) plan, taking out a loan is not advisable, as it can have a significant impact on your retirement.
Consider it only after excluding balance transfer cards and other types of loans.
One of the advantages is that this loan will not appear on your credit report, so there is no impact on your score. But the downsides are significant: if you can’t repay, you’ll face a hefty penalty plus taxes on the unpaid balance, and you could end up with more debt.
Also, 401(k) loans are usually due in five years, unless you lose your job or quit; they are due on the following year’s tax day.
5. Debt management plan
Can cut your interest rate in half.
Doesn’t hurt your credit score.
Startup fees and monthly fees are common.
Paying off your debt can take three to five years.
Debt management plans roll multiple debts into one monthly payment at a reduced interest rate. It works best for those who are struggling to pay off their credit card debt, but don’t qualify for other options due to a low credit score.
Unlike some credit card consolidation options, debt management plans don’t affect your credit score. If your debt exceeds 40% of your income and cannot be repaid within five years, then bankruptcy may be a better option.
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