How to Consolidate Credit Card Debt

Consolidating credit card debt could save you money and simplify your life -- but how do you do it? Just follow this simple guide.

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Anyone who owes money on credit cards knows this kind of debt can be hard to manage. Not only are interest charges typically high, but you may also owe multiple lenders and be forced to juggle several monthly payments. Consolidation is often the solution to make repayment easier, but you need to know how to consolidate credit card debt to avoid making a bad financial situation worse.

This complete guide will provide the answers you need to help you use debt consolidation to reduce interest and make debt repayment much simpler.

What is credit card debt consolidation?

Consolidating credit card debt involves repaying existing credit card debt by borrowing from a new lender. You can take a credit card consolidation loan to repay multiple existing creditors. Or, you can take a new loan to repay just one card with an outstanding balance.

The goals of credit card consolidation include:

Reducing your interest rate: Ideally, the new loan you take out to repay existing credit card debt should have a lower interest rate than the interest rate on existing debt.
Making debt repayment more convenient: When you owe money on multiple cards and consolidate debt, you'll have one monthly payment to make instead of many.

You can also use credit card consolidation to lower your monthly payment. The amount due each month on your new loan often adds up to a lower payment than the minimum due from all your existing creditors. However, if it's financially feasible, you may want to continue making those higher monthly payments to pay down your consolidated debt faster.

Why you should avoid debt consolidation loans

When you start looking into your options for credit card consolidation, you'll probably come across loans that are specifically marketed as “debt consolidation loans.” While this type of financing may, at first glance, seem to be what you're looking for, the reality is that these loans often don't have very favorable terms and they're sometimes scams.

Instead of taking a loan marketed specifically to people looking to pay off debt, you're better off exploring alternatives such as 0% balance transfer credit cards or personal loans. A 401(k) loan or a home equity loan may also be an option for your situation, but there are big risks to using these last two types of financing.

How to consolidate credit card debt the smart way

To find the right type of financing for a debt consolidation loan, there are a few key factors to consider when comparing loan options:

What is the new interest rate? Interest is the cost you'll have to pay for the new loan. The interest rate on any consolidation loan should be lower than the rates you were being charged on your credit cards. Otherwise, consolidation will cost you money instead of helping you save.
How long is the repayment term? The length of time you have to repay the consolidation loan matters. The longer the repayment term, the lower your monthly payments but the more total interest you'll pay.
How much is the monthly payment? You need to make sure this is affordable. Often, it will be lower than the minimum payments you were paying previously.
Can you qualify? You'll usually need proof of income and reasonably good credit to qualify to consolidate debt. If you can't qualify on your own, you could get help from a cosigner.

It may also be worth thinking about how quickly you can obtain the new financing to repay your old debt. It can take several weeks to be approved for a personal loan or home equity loan, but you may be able to get approved for a balance transfer credit card instantly and quickly move existing credit card debt to the new card.

What are your loan options for consolidating credit cards?

You have four primary options to consolidate credit card debt.

Balance transfer credit cards: A balance transfer credit card is a card that offers a special promotional rate, such as 0% interest for 12 months or 18 months. You can transfer existing credit card debt from multiple cards to your new balance transfer cards. You'll need to apply for a card -- which can be done online -- and the amount of money you can transfer is limited based on the credit line you're approved for. You usually pay a small fee -- such as around 3% of the transferred balance -- but there are some balance transfer cards that don't have this charge.

Personal loans: Personal loans can be obtained from local or national banks, online lenders, or peer-to-peer lending networks. The interest rates are usually much lower than credit card rates, but you'll pay more in interest than with a balance transfer card. You'll work out your repayment terms with your lender, including how much you must pay monthly and the total amount you'll pay in interest. Often, it takes several years to repay a personal loan.

Home equity loans or lines of credit: If you have equity in your home -- which means you owe less than your house is worth -- you can borrow against the equity with a home equity loan or line of credit. You can use the proceeds from the loan to repay credit card debt. Your interest rate will be lower than a personal loan rate because this is secured debt. But, because your house has to serve as the collateral to secure the loan, you put your home in jeopardy if you can't repay your debt.

401(k) loans: A 401(k) loan involves borrowing from your retirement accounts. You can borrow the lesser of 50% of your 401(k) balance or $50,000, provided your plan allows borrowing. You'll pay interest to yourself with this approach, rather than paying a lender. But, if you don't pay back the loan within five years in accordance with payment terms, the money you borrowed will count as a distribution and you'll owe income tax and a 10% penalty. If you leave your job because you quit or are fired, you may have to pay back the full balance right away -- usually within 30 to 60 days.

There are pros and cons to each approach, but many borrowers find using balance transfer credit cards is the cheapest and easiest approach. The big downside of balance transfer cards is that your interest rate will jump up substantially after the initial 0% promotional period ends. If you can't repay your debt in full by that time, you should try to transfer the balance again or take another type of loan out to pay what's due so you don't end up paying a fortune in interest.

Consolidating credit card debt can save you a lot of money

Consolidating credit card debt is worth the effort if you owe a lot of money on your cards because of the substantial savings consolidation can provide.

If you owe $4,000 on one card at 17% interest with a $100 monthly payment and $2,000 on another card at 24% interest with a $75 payment, you'd save $1951.47 in interest if you kept payments the same and transferred debt to a new card with a 3% balance transfer fee, 0% APR for 12 months and a 15% regular APR thereafter. It would take 39 months to repay the balance, which means you'd be paying interest after the promotional rate expired. If you transfer the remaining balance at the end of the promotional period to a new balance transfer card, you'd save even more.

Completing a credit card balance transfer is very quick and easy and the entire process can typically be done online. That's why it's worth figuring out how to consolidate credit card debt so you can stop paying exorbitant interest and move towards becoming debt free faster.