How to Consolidate Credit Card Debt


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Credit card consolidation involves merging all of your existing debt into one loan, which is different from restructuring your debt, which involves renegotiating the terms or amounts of your debt. Using credit card debt consolidation as a debt management tool only gives you one monthly payment to make and can help you pay off credit card debt once and for all.

Read on to find out the best ways to consolidate your debt and how each option could affect your credit score.

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Consolidate with a personal loan or debt consolidation loan

Many banks offer personal loans, and some banks group debt consolidation loans into this same category. Credit card consolidation loans and personal loans can be unsecured – you don’t have to put any assets as collateral for an unsecured personal loan – while others are secured by assets or property, like a car or a house.

Benefits of using a loan to consolidate credit card debt

  • All of your credit card payments are replaced by one monthly payment.

  • You will save money if the interest rate on your personal loan is lower than that on your credit card.

  • You don’t need collateral for an unsecured personal loan.

Disadvantages of Using a Loan to Consolidate Credit Card Debt

  • Interest rates might not be low enough to make a difference.

  • You might not qualify for a personal loan if you have too much debt or bad credit.

  • The lender may charge you an origination fee of 1-5% of the loan amount.

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Consolidate with balance transfer offers

Sometimes credit card companies will trick you into transferring your high rate credit card balances. Credit cards with balance transfer usually offer a special interest rate for a certain period of time, as long as you pay on time. You make at least the minimum payment each month on your balance transfer card, but you can always pay extra to get off debt sooner.

Benefits of Using a Balance Transfer Card to Consolidate Credit Card Debt

  • The promotional interest rate can save you a bundle.

  • Transferring the balance to an existing credit card saves you a thorough investigation of your credit report.

Disadvantages of Using a Balance Transfer Card to Consolidate Credit Card Debt

  • You’ll likely pay a 2-5% transfer fee on the balance transfer card, but depending on how much debt you have and your interest rate, this option may be cheaper than paying interest.

  • If you apply for a new credit card, a request appears on your credit report.

  • Late payment could put your special interest rate at risk.

  • A new credit card could make you spend money.

Consolidate by borrowing against your home or car

You can pay off your credit card debt with a loan secured against your home or car. You will need to own your car or have at least 20 percent of the equity in your home to qualify.

Benefits of borrowing against your home or car to consolidate your credit card debt

  • Using your home as collateral, you can choose between a home equity loan or a line of credit. With an HEL, you have a fixed interest rate and repayment period, typically five to 10 years. With a HELOC, you have a “draw” period where you can use money up to the credit limit and only pay interest on the amount you have drawn.

  • Lower interest rates help you pay off your debt faster.

  • On-time payments improve your payment history on your credit report.

Cons of borrowing against your house or car to consolidate your credit card debt

  • If you don’t pay off your debt, the bank can foreclose on the house or car you put up as collateral.

  • You will likely pay the closing costs of a HEL or HELOC loan, which will reduce your savings by consolidating your credit card debt.

Pay off credit card debt with retirement money

You can use your retirement nest egg to pay off your credit card debt. With an IRA or 401k, you can withdraw money without penalty if you are at least 59 and a half years old. Alternatively, your employer may allow you to take out a five-year loan for up to 50% of your vested 401k account balance.

Benefits of Using Retirement Funds to Consolidate Credit Card Debt

  • Borrowing or withdrawing from your retirement account has no bank approval requirement or impact on your credit score.

  • The interest you pay on your 401k loan goes back to your 401k.

Disadvantages of Using Retirement Funds to Consolidate Credit Card Debt

  • You will pay a heavy price if you withdraw early from a qualified retirement account.

  • You can’t make additional contributions to offset a loan or early distributions, so you lose the tax benefits on that money forever.

  • Your 401k loan may be due immediately if you change jobs or are made redundant.

  • The loss of investment value could outweigh the benefits of consolidating credit cards.

Learn more about: 27 Best Strategies to Get the Most Out of Your 401 (k)

Consolidate by borrowing from friends and family

Borrowing from family and friends offers the widest range of options because your family and friends are not bound by the same formalities as a bank. But you should put everything in writing so that there is no disagreement later.

Benefits of borrowing money from friends or family to pay off credit card debt

  • There is no loan application process.

  • The money you borrow won’t show up on your credit report, so paying off your credit cards will lower your credit utilization rate and help boost your credit score.

  • Your family or friends might be willing to offer you a low interest or no interest loan to help save you money as you get rid of your debt.

Cons of borrowing money from friends or family to pay off credit card debt

  • Not everyone has family or friends who can make loans.

  • Relationships can be strained if you are unable to pay off your debt.

  • One-off payments will not show up on your credit report and will not improve your credit score.

Choose the best option for you

Before rushing into more or less different debt, carefully weigh the pros and cons of different credit card debt consolidation options. Everyone’s situation is different, so the best way to consolidate debt for another person might not be a realistic option for you.

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Last updated: April 21, 2021

This article originally appeared on How to Consolidate Credit Card Debt

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