How to Consolidate Credit Card Debt

Learn the risks and rewards that come with debt consolidation.

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

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

Consolidate With a Personal Loan or Debt Consolidation Loan

Many banks offer personal loans, and some banks lump debt consolidation loans into this same category. Credit card consolidation loans and personal loans can be unsecured — you don’t have to put up any assets as collateral for an unsecured personal loan — whereas others are secured by assets or property, such as a car or home.

Pros of Using a Loan to Consolidate Credit Card Debt

  • All of your credit card payments are replaced with one monthly payment.
  • You’ll save money if the interest rate on your personal loan is lower than your credit card rates.
  • You don’t need collateral for an unsecured personal loan.

Cons 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 poor credit.
  • The lender might charge you an origination fee of 1 to 5 percent of the loan amount.

Related: Can I Use a Personal Loan for Anything?

Consolidate With Balance Transfer Offers

Credit card companies sometimes entice you to transfer balances from your high-rate credit cards. Balance transfer credit cards typically offer a special interest rate for a certain period, 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 become debt-free sooner.

Pros 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 from a hard inquiry on your credit report.

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

  • You’ll likely pay a transfer fee of 2 to 5 percent to the balance transfer card, but depending on how much debt you have and your interest rate, this option might be cheaper than paying interest.
  • If you apply for a new credit card, an inquiry appears on your credit report.
  • A late payment could jeopardize your special interest rate.
  • A new credit card might tempt you to spend.

Consolidate by Borrowing Against Your Home or Car

You can pay down or pay off your credit card debt with a loan that’s secured by your house or car. You’ll need to own your car outright or have at least 20 percent equity in your home to qualify.

Pros of Borrowing Against Your Home or Car to Consolidate Credit Card Debt

  • Using your home as collateral, you can choose between a home equity loan or line of credit. With a 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’ve drawn.
  • Lower interest rates help you pay down your debt faster.
  • On-time payments improve your payment history on your credit report.

Cons of Borrowing Against Your Home or Car to Consolidate Credit Card Debt

  • If you default on your debt, the bank can seize the home or car you offered as collateral.
  • You’ll likely pay closing costs on a HEL or HELOC loan, which reduce how much you save by consolidating your credit card debt.

Repay Credit Card Debt With Retirement Money

You can tap into your retirement nest egg to pay down credit card debt. With an IRA or 401k, you can withdraw money penalty-free if you’re at least 59 ½ years old. Alternatively, your employer might allow you to take a five-year loan against up to 50 percent of your vested 401k account balance.

Pros of Using Retirement Funds to Consolidate Credit Card Debt

  • Borrowing or withdrawing from your retirement account has no bank approval requirements or impact on your credit score.
  • The interest you pay on your 401k loan goes back into your 401k.

Cons of Using Retirement Funds to Consolidate Credit Card Debt

  • You’ll pay a hefty price if you take an early withdrawal from a qualified retirement account.
  • You can’t make extra contributions to make up for a loan or early distributions, so you lose the tax advantages on that money forever.
  • Your 401k loan might be due immediately if you change jobs or get fired.
  • Loss of investment value might outweigh the benefits of credit card consolidation.

Learn About: 5 Debts You Need to Tackle Before You Retire

Consolidate by Borrowing From Friends and Family

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

Pros of Borrowing Money From Friends or Family to Pay Off Credit Card Debt

  • There’s no loan application process.
  • The money you borrow won’t show up on your credit report, so paying off your credit cards will reduce your credit utilization ratio and help boost your credit score.
  • Your family or friends might be willing to offer you a low- or no-interest loan to help you save money as you get out of 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 repay your debt.
  • On-time payments won’t show on your credit report or help your credit score.

Choosing the Best Option for You

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

Up Next: 10 Best Debt-Consolidation Companies