How To Consolidate Credit Card Debt

Struggling to pay off credit card debt? You’re not alone. According to the Federal Reserve, Americans have a whopping $1.12 trillion of outstanding credit card debt!

If you’ve been trying to get out of debt for a while but don’t feel like you’re making any progress, debt consolidation is an option to consider. It’ll help lower your interest rates, making it possible to pay off your debt faster.

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What Is Credit Card Debt Consolidation?

Credit card debt consolidation is when you restructure your debt, either by transferring your existing balance to a new credit card or by refinancing your debt with an entirely new loan.

If you’re juggling multiple credit card bills, consolidation can help keep you organized since you’re combining them all into one.

You can also use consolidation to lower your interest rate. Some credit cards offer balance transfers with a 0% introductory APR (annual percentage rate) — meaning you won’t be charged any interest on that transfer for a certain number of months. 

Consolidating your debt can help you pay it off much faster. Then, you can free up more of your cash to do other things, like build your emergency fund or start investing!

READ MORE: Should You Pay Off Debt or Invest?

How To Consolidate Credit Card Debt

The process for consolidating your credit card debt is similar to applying for a loan. You’ll need to fill out some basic personal and financial information, such as your ID and income. 

Once you’re approved, one of two things will happen:

1. Your new lender will deposit a fixed amount of cash into your bank account. You’ll use the funds to pay off your existing debt. 
2. Your lender will pay off the credit card directly on your behalf. This is usually the case for balance transfers.

Once the old loan is paid off, you’ll be responsible for making payments to the new lender. 

Here’s a three-step process for consolidating your debt:

1. Count up all your debt

Before you consolidate, take an inventory of what your current debts are. 

Count up the outstanding balances you have on any credit cards. Also tally the balances for your student loans, medical bills, mortgage, car payments, and any other debts you are liable for.

Look at the balance, interest rate, and monthly payment for each debt. You’ll want to be able to refer back to this information to see how well a new loan compares to your existing terms.

2. Choose the right loan to consolidate your debt

Depending on your financial situation, one type of loan might be better than another. 

Refer back to the list of your outstanding debts to decide which type of consolidation loan makes the most sense for you.

Transfer your balance to a new credit card

Balance transfers are special offers provided by credit card companies that allow you to move an existing credit card's balance to a new one. 

Transfers typically come with a fee but offer 0% APR for a specific period, usually anywhere from 12 to 21 months. 

If you repay the balance before the introductory period ends, you’ll have repaid your credit card debt interest-free.

Apply for a personal loan

Personal loans are available at many banks and online lenders. But because there’s no collateral securing the loan, these loans often come with high interest rates. 

That being said, with the average credit card interest rate around 25% according to LendingTree, a personal loan might still be lower, helping you repay your debt much quicker. 

READ MORE: Should I Get a Personal Loan to Pay Off Credit Card Debt?

Enroll in a debt repayment plan

Credit counselors are trained professionals who work with you to develop a plan to manage your debt. 

The best counselors are non-profit and approved by the U.S. Department of Justice. 

You can also search for counselors through the Financial Counseling Association of America and the National Foundation for Credit Counseling.

Your counselor will set up a debt management plan where they take on your credit card debt on your behalf. Instead of paying your credit card company, you’ll make payments to your debt counselor. 

Or, your counselor might work with your credit card company to negotiate better terms that make your debt more manageable.

Take out a second mortgage

If you own a home, you can use the equity from it to refinance your credit card debt. 

A home equity loan or home equity line of credit (HELOC) uses your home’s value as collateral, which makes it more secure for lenders than other loans. Because of this, they often offer a lower interest rate than what you would pay on a credit card.

Just remember that if you don’t pay it back, your home is on the line!

Borrow against your retirement

While there are tax implications to consider, you can borrow against your 401(k). The IRS allows you to borrow up to 50% of your vested balance or $50,000, whichever is less. 

Because you’re borrowing against your retirement savings, repayment goes back to you instead of a credit card company. 

These loans come with some risks. For example, they must be repaid within five years, so if you want to take out a loan from your 401(k), plan accordingly.

3. Create a plan to repay your debt

The final thing you’ll want to do when consolidating your credit card debt is to create a budget to avoid going back into debt.

One of the biggest risks of a balance transfer offer or taking out a personal loan is continuing to live beyond your means. If you add new charges to your credit card while also trying to pay off existing balances, you’ll find yourself deeper in debt.

Evaluate your current spending habits. Look for things to eliminate or trim. 

Drawbacks of Debt Consolidation

Debt consolidation can rein in your debt but there are some negatives to consider.

Depending on your creditworthiness, you might not get the best rate on a new loan. Or, while a new loan could reduce your monthly payment, it might extend the lifetime of the loan, increasing the total cost of it.

Some loans may require a hard pull on your credit. While this isn’t necessarily a bad thing, having too many credit checks or new loan applications in a short period can ding your credit score.

Finally, if you take out a debt consolidation loan without having the right budget in place, you risk going into even more debt. You need to stop using your existing credit cards and any new ones you transfer your balance onto. 

You don’t want to create new debt in the debt consolidation process!

READ MORE: How Does Debt Consolidation Work and Is It Right for You?

FAQs

Can I still use my credit card after debt consolidation?

It depends on your situation. If you transfer the balance but don’t close your existing credit card, then yes, you can still use it after consolidation. But if you do, you risk going into more debt.

If you decide to work with a credit counselor, they may take over your credit card on your behalf. In this case, the line of credit originally issued to you would be closed and you would no longer be able to use your credit card.

How can you combine credit cards into one payment?

When you consolidate your credit card debt, you are either issued a lump sum payment by your lender or you provide your existing credit card account information to a new issuer. 

This allows you to use the new loan to combine multiple debts into one.

What’s the difference between debt consolidation and refinancing?

Debt consolidation and refinancing are two ways you can pay off credit card debt: 

• Consolidation combines multiple debts into one new loan. Transferring the balances of several credit cards onto a new card is an example of debt consolidation.
• Refinancing is moving one debt into a new loan. A balance transfer from one credit card to another is an example of a refinancing. 

TL;DR: Consolidating Credit Card Debt

Debt consolidation helps you simplify the number of debts you’re responsible for and makes your debt more manageable. 

You can transfer your existing balance onto a new credit card, get a personal loan, get a secured loan such as a HELOC, or get help from a credit counselor.

Just remember that adding to your debt after you get a new card or loan could lead you into more debt, so make sure you have a budget in place!

For more tips on how to best manage your budget, check out these episodes of the Erika Taught Me podcast:

• How To Budget for Beginners
• 10 Steps Towards Financial Wholeness
• You’re Programmed to Fail: Here’s How To ACTUALLY Succeed

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