Credit Cards » Credit Card Guides » How to Consolidate Your Credit Card Debt – Full Guide
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How to Consolidate Your Credit Card Debt – Full Guide

Consolidating your credit card debt can be done in several different ways - using a credit card balance transfer, taking a personal loan, use your home equity to get funded, and even use your retirement or life insurance plans. Let's review the different options and understand what's the right way for you.

You can trust the integrity of our unbiased, independent editorial staff. We may, however, receive compensation from the issuers of some products mentioned in this article. See how we make money.

Table of Content

Carrying a credit card balance can be a massive impediment to financial health. However, there are 0% credit cards that allow you to pay down your debt without incurring interest within the introductory period.

As you can see from this FED Survey of Consumer Finances data chart, the age group that tends to carry the highest credit card balances is the 75 and older age group with $8,000 on average. This is closely followed by the 45 to 54 age group with an average of $7,670.

Credit Card Balance by Age

What is Debt Consolidation?

What does debt consolidation really mean? It means you’re going to get one larger loan that takes care of smaller loans.

That means you only have to make a single payment each month instead of payments on each card.

The idea is that things are going to be easier for you this way. Not only that, but you may be able to lower your interest rate and your monthly payment. That gets you paid up faster.

Debt Consolidation Benefits

Debt consolidation can provide a number of benefits, including a speedier, more streamlined payback and cheaper interest payments.

Combining numerous loans into a single loan decreases the number of payments and interest rates you must deal with. Consolidation can also help you enhance your credit by lowering your risks of skipping a payment or paying late.

Furthermore, because your debt consolidation loan has a lower interest rate than separate loans, consider making additional payments with the money you save each month. This will allow you to pay off the loan sooner, saving you even more money in the long run on interest.

You may also be able to lower your overall interest rate by combining debts, even if you have largely low-interest loans, if your credit score has improved since applying for other loans. Especially if you don't consolidate with a long loan term, this can save you money throughout the life of the loan. Because future payments are spread out across a new and possibly longer loan period when you consolidate debt, your overall monthly payment is likely to drop.

Does Consolidating Debt Ruin Your Credit?

When you consolidate your debt, you can effectively reduce monthly payments. Not only that, but consolidation might also result in your credit score dropping temporarily. Two common methods of debt consolidation include obtaining either a balance transfer card or a debt consolidation loan.

Both require performing hard inquiries, which can result in a lower credit score (typically a few points). Of course, changing your habits that caused you to fall into debt in the first place and paying your bills on time will significantly improve your standing.

Keep in mind that consolidation and settlement are two different things. With a consolidation loan, you’re going to pay off your full debt and you’re not going to have negative effects on your credit.

Why Does Debt Consolidation Typically not Save Money?

The answer to this is often that debt consolidation provides a lower monthly repayment amount because you will have a longer repayment period. As a result, you will be in debt longer. When you merge, lower interest rates are not always guaranteed.

What’s more, debt consolidation loans usually charge balance transfer fees, loan set up fees, annual fees, and settlement costs. Because of this, you could end up breaking even or paying more than what you’re paying now.

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Credit Card Debt Consolidation – What Are Your Options?

When it comes to the exact steps you should take, depends on your current financial situation, you'll need to choose between a couple of options:

1. Credit Card Balance Transfer

One of the most common ways that people consolidate debt is through a balance transfer. That means transferring the money owed to a single credit card with a lower interest rate.

For those who are looking at this option, you’ll need to evaluate it first. Do you want to decrease your monthly payments? Do you want to pay off your debt more easily? Or maybe you want to decrease your interest rate? Are you looking for all of the above?

If you move all your debt to a single card with lower interest it can save you a lot of money.

You want to look for low interest or 0% interest, but check the length of that period. After all, 0% will generally only last 12-40 months. After that, you’re going to owe interest. For consolidating to a new card you want to make sure that everything is done properly.

That means transferring the balance and then double-checking that balance. You want to verify that the new card has a balance. You then want to verify that the old card has a $0 balance.

Make sure you talk to someone on the phone and that you record their names. If you’re going to cancel a card this is even more important. You want to have a record. Remember, transferring money to a new card can affect your credit score.

Because FICO looks at the amount you’re using on a card versus what you have available, you could see a change in your score. When you start paying down accounts it’s going to lower your credit utilization.

But you’ll have a single card with a large balance when it comes to consolidation. That can lower your score. Still, if you have a lower interest rate you should be able to start getting rid of that debt faster.

2. Debt Consolidation Personal Loan 

You may be able to get a loan with a lower interest rate. If that’s the case you can use it to pay off higher interest credit cards.

Then you can start making the payments and getting rid of the debt faster.

These personal loans can come from just about any financial institution. You can even find them online. Just now that your credit is going to be a big factor in whether you get the loan and what interest rate you’ll have.

Personal loans give you a set payment for a set period of time. You’ll usually have somewhere from 3-5 years of payments to make, depending on your debt. In some cases, you can get secured loans, with a CD or even a savings account used as a type of collateral.

If you can get a much better rate on your savings you might want to go for it. Otherwise, you may want to just use the savings on the debt.

When it comes to a personal loan you’re not going to have anything at risk. A secured loan can give you a lower interest rate, but you won’t pay too much on the loan anyway. And you’re definitely paying less than you would be across several cards. If you don’t have great credit, however, you could struggle to get an unsecured loan.

After all, the reason you’re going for the loan in the first place is because you’re having financial problems. You’ll also find that interest rates are higher here. That means you may not see much improvement over your current situation.

Personal loans offer a flexible form of finance, as they can be used for practically any purpose. In this chart compiled from LendingTree consumer data, you can see that debt consolidation is the most common reason for taking out a personal loan. The least common reason is for home improvement. This is likely due to more advantageous products that can be used for home improvements such as home equity lines of credit.

percent of Personal Loans by reason

3. Home Equity Loan

A home equity loan is also known as a second mortgage.

What this means is you’re using your house as collateral for your loan. Keep in mind that this is going to be very risky. You want to make sure you know all of the details when it comes to something like this, since the risk is so large. If you have good credit this might be a good option.

If you have a good amount of equity built up in your house it might be good as well. You just really want to make sure you have a low level of interest. You’ll be able to put money into your house to get even more of that equity as well. Of course, there’s always a catch.

With this type of loan, your house is on the chopping block. That means, if you can’t pay your financial institution can foreclose. Anyone who has ever seen foreclosure signs before knows how devastating they can be. Low-interest rates can seem like a great idea, but the risk may not always be worth it.

You’ll be taking a risk here. If you’re not completely sure you can make the payments you could be in big trouble. You could end up being foreclosed on and in court.

All of that can destroy your life the way you know it. Make sure you evaluate the risks carefully.

Home equity lines of credit are loans that allow the homeowner to borrow against the equity in their property. This can be an effective way to restructure finance, pay for home improvements or pay for a significant purchase.

As the following chart using FED Survey of Consumer Finances 2019 data, the average by family lines of credit fluctuates over time. In 2001, the average was at a low of $37,000 per family. This peaked in 2010 at $64,000.

Home-Equity Lines of Credit (HELOC)

4. Using Your Retirement Plan

Another option is to use a retirement account. For those who have been putting away money in any kind of IRA or 401(k), that money can be used toward your debts.

This type of loan also should be carefully considered. When you get to retirement you want that money to be there. That means you should evaluate the options and the consequences if you withdraw from this account.

You’ll have a smaller retirement account. You’ll also have an income tax and early withdrawal penalties on the money. Plus you have to pay it back within just 5 years or face even more penalties.

Don’t put this one at the top of your list. In fact, keep it down at the bottom.

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5. Borrowing From Life Insurance

While both term life insurance and universal life insurance each offer cash value.

You’ll have the opportunity to borrow money from them after you’ve made some payments. What’s great is this type of loan is really easy to get. You’re getting cash value from the insurance policy and it’s being used as a type of collateral.  Money gets taken from that cash value or from the benefits that are paid out on your death.

Make sure you consider whether this really makes sense with what you’re going through.

The biggest problem that most people have here is what happens if you don’t pay.

If you don’t pay the money back and you don’t add in the interest you’re going to have compounded interest. You’re going to have a balance that adds up. And that balance may ultimately be higher than the cash value you have.

You’ll need to keep a close eye on what’s owed and what’s in the policy so you don’t get canceled. You also want to make sure you pay it back so the death benefits you wanted are going to be there.

Should I Consider It?

If you’re going to save some money or get your debt paid off quicker it makes sense to consolidate your debt. On the other hand, there are things you need to think about.

When it comes to your specific situation you want to consider the options. The specific debt that you have, including how much and your interest, is important. It takes a bit of research but you could have the best option for you.

Talk with a debt settlement lawyer to find out more about the options.

You can talk about your options for consolidation versus settlement, including debt settlement on your own. But make sure you’re staying away from the debt settlement companies.

When Debt Consolidation Isn’t Worth It?

If you have yet to correct the cause behind your bad credit, debt consolidation isn’t worth it. This is because debt consolidation isn’t a “fix” for bad credit. Yes, you may save money on interest and minimize your total monthly payments.

But the underlying cause of your bad credit will still be there. Until you resolve your credit problem, make a budget, reduce expenses, and tighten up spending, it’s likely that you will end up being in debt all over again.

How to Avoid Credit Card Debt?

It is, nonetheless, feasible to remain debt-free. To prevent sliding into a debt trap, use these measures:

  • Pay on Time – One of the most effective strategies to avoid credit card debt is to keep up with your payments. If you skip a payment, you'll have to make two payments plus pay a late fee, so your next payment will be substantially larger. It becomes more difficult to catch up, putting a burden on your budget and tempting you to utilize your credit cards to get by.
  • Stick to What You Can Afford – When you see something you want but can't afford, having access to credit can be enticing. While you may reason that you can pay over time, pledging your future income is a dangerous proposition.
  • Make a Budget – Budgeting your monthly spending allows you to keep track of where your money is going and how much you can afford to spend. Calculate how much you should put into savings, your 401(k), and how much money you have left over to spend on needs each month.
  • Have an emergency fund in case things go wrong – For those “just-in-case” scenarios, emergency savings are critical. When it comes to emergency savings, it's best to have at least six months' worth of income set aside.
  • Know how much credit you're using – Don't use more than 30% of your available credit, but don't let it sit unused to get the most out of your card.
  • Use 1-2 Cards Only – You should keep the amount of cards you have to a minimum. Multiple credit cards imply multiple payments and more interest charges. This is a set-up for debt consolidation in the future if you can't manage your credit cards responsibly.
  • Consider your options before making a purchase – Take the time to consider significant purchases to avoid impulse purchases and credit card debt. Is this something I actually need? Is it within my financial constraints?

Credit Card Debt Consolidation FAQs

There are several government programs to assist you in getting out of debt. However, there is one type of debt that the government does not provide relief for, and that is credit card debt.

At present, there are no government plans or programs that can eliminate or even minimize the burden of paying off your credit card balances.

However, there are 501(c)3 non-profit consumer credit advisory services that can work with you to provide debt relief. These institutions are funded by grants from credit card companies. They provide funds to these institutions to help restore customers with excessive credit.

You can use personal loans to consolidate your debts and thus repay several of your debts with a single monthly payment. Although this may simplify your debt repayments and possibly save you some money, it’s not always a sure thing.

As such, it’s best to research alternatives and compare their various interest rates. One possible option is doing a balance transfer on credit cards. If your goal is to repay debts, then debt

A debt management plan, sometimes known as a DMP, is a slightly different approach to debt reduction. Instead of consolidating your debt, you're actually consolidating your debt payments. To put it another way, you're not paying off a bunch of old debts and replacing them with new ones; instead, you're making a single, consolidated payment that gets distributed to your creditors each month.

Using a DMP has some distinct advantages. They're normally managed by non-profit credit counseling companies, and as part of the process, you'll receive financial education. Most creditors are prepared to lower your credit card account's interest rate and waive certain late or over-limit fees in return for engaging with a credit counseling firm.

A DMP is also tailored to your financial situation, so payments must be manageable. The majority of DMPs are finished in 3 to 5 years. To begin a DMP, all you need to do is contact a reputable credit counseling service.

While falling into debt can be stressful, you don't have to be concerned about going to jail because of your credit card debt. Only a few financial problems, such as failing to pay child support or taxes, can result in a jail sentence.

So, while falling into credit card debt isn't ideal, you shouldn't have to worry about going to jail unless you're doing it on purpose.

If you're having trouble paying off your credit card debt, you might be able to work out a deal with your lender. Many lenders are willing to work out a credit card debt settlement with consumers who are in financial difficulties.

You might be able to agree to an interest freeze or even a settlement sum, in which case you can pay off less than your existing balance and the account will be closed.
So, if you're having trouble paying off your credit card debt, contact your lender, who may be able to assist you.

Most credit card companies set a fixed rate for at least a certain amount of time. 

While most card issuers configure their rates to be fixed rather than variable, this rate may increase if your circumstances change, such as if you skip payments or your credit score declines.

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