3 ways to consolidate credit card debt

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Paying off credit card debt can be accomplished through one of three credit consolidation methods: balance transfers, home equity, and personal loans. (Shutterstock)

Credit cards can be useful financial tools. Unfortunately, they can also create financial hardship if you don’t pay off your balances on time. Americans paid about $120 billion in credit card interest and fees from 2018 to 2020, or an average of about $1,000 a year for each household, according to the Consumer Financial Protection Bureau (CFPB).

With 83% of adults holding at least one credit card and most having an average of 3.84 credit card accounts, it’s easy to see how people are racking up debt. If you transfer credit card balances from month to month, these three credit card consolidation strategies can help you save money and pay off debt faster.

A personal loan is a way to consolidate credit card debt. Credible, it’s easy to view your prequalified personal loan rates from various lenders, all in one place.

1. Refinance with a balance transfer credit card

Although it may seem contradictory, you can use a credit card to help pay off your credit card debt. A balance transfer credit card lets you consolidate your existing credit card debt onto one new credit card.

Refinancing with a balance transfer credit card can be one of the the cheapest ways to pay off credit card debt if used effectively. Many credit card companies offer incentives for opening a balance transfer credit card, such as a 0% introductory APR on balance transfers for a certain period of time. This allows you to pay off your credit card debt with one monthly payment without accruing more interest.

But you usually need great credit to qualify for a card with a 0% APR offer, and you’ll only get that incentive for a limited time. If you still have a balance at the end of the promotional period, you will start earning interest at the card’s regular rate, which may be high. You may also be subject to balance transfer fees, which typically range from 3% to 5% of each balance you transfer.

Talk to your credit card issuers about ways you can negotiate your credit card debt before removing a new card. But be aware that paying less than you owe on your credit cards or any other type of debt can hurt your credit.

2. Take out a debt consolidation loan

A debt consolidation loan is an unsecured personal loan that you can use to consolidate multiple sources of high-interest debt, such as credit cards. These loans usually have a fixed interest rate, do not require collateral and come with fixed monthly payments. They can also help boost your credit score by reducing your credit usage and adding to your credit mix (the different types of credit products you have).

If you have good credit, you may be able to get a lower interest rate on a debt consolidation loan than what you were paying on your credit cards. The better your credit, the lower the rate you will receive.

But you may need to pay some fees when you subscribe a debt consolidation loansuch as origination fees for processing the loan or prepayment penalties for repaying the loan earlier than expected.

Consolidating several monthly payments into one payment can help you better manage your debt. Follow these steps to remove a debt consolidation loan:

  1. Check your credit. Request free copies of your credit reports from the three major credit bureaus by visiting AnnualCreditReport.com. Dispute any errors in your credit report and consider raising your credit score before applying for a loan if it can get you better terms.
  2. Shop and compare. Compare debt consolidation loan rates from several lenders, both online and at your bank or credit union. By comparing their interest rates, terms, fees, and other factors, you can choose the loan that offers the most benefit for your unique situation.
  3. Apply. Once you’ve chosen a lender that works for you, it’s time to officially apply for the loan. You will need to provide documents to verify your employment and income, such as pay stubs and W-2 forms. If you’re having trouble qualifying for a debt consolidation loan on your own, explore adding a co-signer to your application. This can increase your chances of approval and help you get a better interest rate. Keep in mind that using a cosigner financially obligates them to repay the loan if you don’t. Any missed payments will also negatively affect their credit.

Credible, it’s easy to compare personal loan rates from various lenders, and it will not affect your credit.

3. Use the equity in your home

You also have the option of using the equity in your home to pay off your credit card debt. You can do this in two ways: through a home equity loan or a home equity line of credit (HELOC).

  • A home equity loan is often called a second mortgage which allows you to borrow up to 80% of the equity in your home. Home equity loans usually have fixed interest rates and must be repaid within a predetermined time frame. This loan is secured by your home, which means that if you don’t pay it back, your lender can foreclose on your home.
  • A HELOC is similar to a credit card: you can draw on this revolving line of credit several times up to a certain amount. Like home equity loans, this financing is secured by your home, which means you could lose your home if you don’t pay off the line of credit. Unlike home equity loans, HELOCs often have varying interest rates and payment schedules, so it’s more difficult to plan a consistent repayment schedule.

The CFPB notes that while using the equity in your home is one way to consolidate your debt, many people are not able to reduce their overall debt by taking on more debt unless they also reduce their overall spending. .

Ways to Stay Debt Free

Effectively managing your debt is the first step to avoid going into debt in the future. Here are some ways to help you stay debt-free in the future:

  • Create a budget. Write down all your monthly expenses and subtract that amount from your gross monthly income. This will give you an idea of ​​where your money is going. Look for other savings opportunities or places where you can cut back to save even more. Review your budget periodically to see if you need to make any changes to stay on track.
  • Focus on building your savings. Try to save three to six months of living expenses in an emergency fund. If you have an unexpected expense in the future, you can use money from your emergency fund to cover it instead of charging additional credit card debt. Consider asking for a raise at work or taking on a side hustle to help you save even faster.
  • Consider nonprofit credit counseling. A non-profit credit counselor can talk to you about your financial situation. They will help you develop a personalized plan and give you tools to avoid getting into debt. Free or low-cost counseling services are available from many credit unions, nonprofits, and religious organizations. You can also contact your local attorney general to find reputable credit counselors where you live.

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