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5 Methods for consolidating Credit Card Debt

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5 Ways to consolidate Credit Card Debt

A consolidation plan for your credit card debt might be an option if the new debt has an APR lower than the credit card you have.

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Updated on September 27th 2022.

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Credit debt consolidation is a method which takes multiple credit card balances and combines them into one monthly payment.

is ideal if your new debt has the lowest annual percentage rate than the credit cards you use. This could lower interest costs, make your payments more manageable or shorten the payoff period.

The most effective method to consolidate depends on the amount of debt you’re carrying as well as your credit score and other aspects.

Do you want to reduce your debts by consolidating your credit cards balances? See if you prequalify.

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Here are the five most effective ways in order to repay credit card debt:

Refinance with the credit card that allows balance transfers.

Consolidate with a personal loan.

Tap home equity.

Take into consideration 401(k) savers.

Start a debt management plan.

1. Card for balance transfer

Pros :

APR introductory period of 0.

A year or more to pay off debt without the cost of.

Cons:

Requires good to excellent credit for approval.

Usually, this is the cost of transferring balances.

Higher APR kicks in immediately following the initial period.

Also called credit refinancing of a credit card, this method transfers credit card debt to a credit card that does not charge interest for a promotional periodof typically between 12 and 21 months. You’ll require good to excellent credit (690 credit score or higher) to be eligible for many balance transfer cards.

A credit card that is a good balance transfer option does not have an annual fee, however some issuers charge a one-time cost for balance transfers of% to 5% of the amount transferred. Before you pick a credit card, determine if the interest savings you make over time will wipe out the cost of the fee.

Make sure to pay your balance down completely before the 0% initial APR period has ended. Any balance left beyond that period will be subject to a regular credit card interest rate.

>> COMPARE:

2. Consolidation of credit cards loan

Pros:

Fixed interest rate implies that your monthly payment won’t change.

Low APRs for good or excellent credit.

Direct payment to creditors offered by some lenders.

Cons:

Hard to get a low rate even with poor credit.

Some loans come with an origination cost.

Membership in credit unions is required to apply.

You can take advantage of an unsecure personal loan from an institution like a bank, credit union and online lenders to consolidate credit card debt or other kinds of debt. In the ideal scenario, the loan will offer you a lower APR of your credit card.

These are lenders for not-for-profit organizations that can provide their customers with more flexible loan conditions and lower costs than lenders online, particularly for borrowers who have fair or bad credit (689 credit score or lower). The maximum APR charged at federal credit unions is 18%.

Bank loans provide competitive APRs for good-credit borrowers, and the benefits for customers of the bank may include greater loan amounts as well as rate discount.

The majority of online lenders allow you to pre-qualify for a without affecting your credit score, but this option isn’t as popular with credit unions and banks. Pre-qualifying gives you a preview of the interest rate, loan amount and term you may get once you apply for the loan.

Look for lenders that have special offers for debt consolidation. Some lenders, for example, will discount the rate on a credit consolidation loan or send your loan money directly to creditors making the process.

Not sure if a personal loan is the best choice? Utilize our service to list all of your debts in one place, look up typical rates from lenders, and calculate your savings.

>> COMPARE:

3. Equity in your home loan (also known as a line of credit)

Pros:

Typically lower interest rates as compared to personal loans.

May not require good credit to qualify.

The longer repayment time keeps the cost at a lower level.

Cons:

You need equity in your home for you to be eligible, and a home appraisal is typically required.

You are secured by your home and you may lose it if you do not pay.

If you’re an owner you could be able take out a loan or credit line on the equity in your house and utilize it to pay off your credit cards and other debts.

A is a lump-sum loan with an interest rate that is fixed and a line of credit is similar to an credit card that has an interest rate that is variable.

It is common for interest-only payments to be made during the draw period, which typically lasts for 10 years. That means you’ll need to make higher than your minimum due to reduce the principal and make a dent in your overall debt during this period.

Since that the loans can be secured with your home so you’re likely to pay an interest rate lower than that you’d find on an individual loan or balance transfer credit card. But, you could also lose your home if you aren’t able to keep up with your payments.

>> MORE:

4. 401(k) loan

Pros:

Lower rate of interest than non-secured loans.

There is no impact of your credit scores.

Cons:

It could affect your retirement fund.

A large penalty and charges if you can’t repay.

If you are fired or lose the company, then you could need to repay the loan.

If you are a member of an employer-sponsored retirement account like the 401(k) plan is not advised to get a loan from it, since it could have a significant impact on your retirement.

Think about it after you’ve eliminated balance transfer cards as well as other kinds of loans.

The benefit is that the loan won’t show up in your credit file, so there’s no impact on your credit score. However, there are some drawbacks If you are unable to repay the loan, you’ll be charged a significant penalty and taxes on the unpaid balance, and you could end up facing debts that are more.

As well, 401(k) loans typically are due in five years, unless you lose your job or quit; then they’re due on tax day of the next year.

>> MORE:

5. Debt management plan

Pros:

Payable on a fixed monthly basis.

May lower the interest rate in half.

It won’t affect your credit score.

Cons:

Monthly and startup fees are common.

It may take three to five years to pay off your credit card.

Combine several debts into one monthly payment, with a lower interest rate. It works best for those who are struggling to pay off credit card debt, but do not qualify for other solutions due to a poor credit score.

Contrary to some consolidation alternatives, debt management plans do not affect your credit score. If your debt is more than 40% of your income and cannot be paid off within five years, then debt management could be a better choice.

You can find the debt management program through a nonprofit .

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Most frequently asked questions What exactly is debt consolidation?

Debt consolidation rolls multiple debts, including high-interest credit cards or loans in one payment.

Do I have to consolidate debt?

Debt consolidation might be an option when you’re able to get lower rates of interest than the current rate on your debts. This could lower interest costs as well as lower the monthly installment or assist in paying off debt faster.

What effect will consolidating debt have on my credit?

Your credit score could temporarily dip when a lender or credit card issuer makes an inquiry into your credit. If you pay on time and avoid getting into from debt for the near future the effect may be positive.

What is debt consolidation?

Debt consolidation rolls multiple debts, including high-interest credit cards or loans in one payment.

Do I have to consolidate to pay off my debt?

Debt consolidation could be an option when you’re able to get an interest rate that is lower than the one you currently pay on your debts. This would reduce interest costs as well as lower the monthly installment or help you pay off debt more quickly.

How will consolidating debt affect my credit score?

Your credit score could temporarily dip when a lender or card issuer conducts a hard credit inquiry. If you pay on time and avoid getting into from debt for the future, the overall effect could be positive.

The authors’ bios: Steve Nicastro is a former NerdWallet expert on personal loans and small-business loans. Its work was highlighted by The New York Times and MarketWatch.

Jackie Veling covers personal loans for NerdWallet.

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