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5 Methods to Consolidate Credit Card Debt

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5 Strategies to consolidate Credit Card Debt

The consolidation of your debts on credit cards might be an option when the new debt is an APR that is lower than the one on your credit cards.

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Last updated on Sep 27, 2022

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Credit consolidating debt is an strategy which takes multiple credit card balances and combines them into a single monthly payment.

is ideal if your new debt has a lower annual percentage rate than the credit cards you use. This can reduce interest costs as well as make the payments more manageable , or even shorten the time to pay off.

The best way to consolidate will depend on how much debt you have, your credit score and other factors.

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These are the five most effective methods in order to repay credit card debt

Refinance with a credit card that allows balance transfers.

Consolidate with a personal loan.

Tap home equity.

Consider 401(k) savers.

Start a debt management plan.

1. Card for balance transfer

Pros :

0% introductory APR period.

One year or more is enough to pay off debts without interest.

Cons:

Credit score must be excellent or good to qualify.

Usually carries a balance transfer fee.

Higher APR starts immediately following the initial period.

Also known as credit card refinancing, this option is a way to transfer debt from a credit card to the credit card which does not charge interest for a promotional periodof usually between 12 and 21 months. You’ll need good to excellent credit (690 credit score or higher) to qualify for most balance transfer credit cards.

A good balance transfer card will not charge an annual fee, but most issuers charge a once-off charge for balance transfers of between 3% to 5percent of the amount transferred. Before you pick a credit card, determine if the interest you earn over time will wipe out any cost associated with the fees.

Aim to pay your balance down completely before the 0% initial APR period is over. Any balance remaining after this time period will incur an ordinary credit card interest rate.

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2. Credit card consolidation loan

Pros:

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

Low APRs are available for people with good and excellent credit.

Direct payment to creditors offered by certain lenders.

Cons:

Hard to get a low rate for bad credit.

Certain loans carry an origination fee.

The credit unions need membership in order to apply.

It is possible to take out an unsecured personal loan from a credit union, bank or online lender to consolidate credit card or other types of debt. In the ideal scenario, the loan will offer you a lower APR for your loan.

are not-for-profit lenders that may provide members with more flexible loan conditions and lower costs than lenders online, particularly for borrowers with poor or fair credit (689 credit score or lower). The maximum APR charged at federal credit unions is 18%.

Bank loans provide competitive APRs for borrowers with good credit, and the benefits for customers of banks may include higher loan amounts and rate discounts.

The majority of online lenders allow you to pre-qualify to borrow without affecting your credit score, but this option isn’t as popular with credit unions and banks. Pre-qualifying lets you get a preview of the rate, loan amount and term that you can expect to receive once you have applied.

Find lenders who have special offers to help you consolidate debt. Some lenders, for instance, will discount the rate on the credit consolidation loan or send the loan funds directly to your creditors, simplifying the process.

Are you unsure if a personal loan is the best option? Utilize our service to list all of your debts into one place, look up the average rates from lenders, and estimate savings.

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3. Home equity loan or line of credit

Pros:

The typical interest rate is lower that personal loans.

It is not necessary to have good credit to qualify.

The longer repayment time keeps the cost lower.

Cons:

You need equity in your home to qualify to be eligible, and a home valuation is often required.

Your home is secured and you may lose it if you default.

If you’re a homeowner you could be able avail a loan or line of credit on the equity in your home . You can use it to pay off your credit cards and other debts.

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

A often requires interest-only payments during the draw period which is usually the first 10 years. That means you’ll need to pay more than the minimum payment in order to lower the principal and make a dent in your overall debt during the period of.

Because that the loans come with the security of your home so you’re likely to pay lower rates than you’d get with the personal loan or credit card for balance transfer. However, you can also lose your home if aren’t able to keep up with your payments.

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4. 401(k) loan

Pros:

Lower interest rates than unsecured loans.

No impact on your credit score.

Cons:

It could affect the retirement savings of your.

Fees and penalties can be very high If you are unable to pay.

If you quit or lose the company, then you might be required to pay off the loan.

If you are a member of an employer-sponsored retirement account , such as one called a 401(k) plan It’s not recommended to take out a loan from it, as this could significantly affect your retirement.

You should consider it only after having removed balance transfer cards as well as other kinds of loans.

One benefit is this loan will not show up in your credit file, so there’s no impact to your credit score. However, the disadvantages are substantial: If you can’t repay, you’ll owe a hefty penalty and taxes on the unpaid balance, and you may be left facing debts that are more.

As well, 401(k) loans typically will be due within five years until you are fired or terminate your employment or quit your job; in which case, they’re due on tax day of the next year.

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5. Debt management plan

Pros:

Payable on a fixed monthly basis.

Might reduce your interest rate by half.

Doesn’t hurt your credit score.

Cons:

Startup fees and monthly fees are not uncommon.

It could take anywhere from three to five years to pay off your loan.

combine several debts into a single monthly payment at a reduced interest rate. This is a great option for people who struggle with debt from credit cards but don’t qualify for other options because of a low credit score.

Unlike some credit card consolidation options, debt management programs don’t affect your score on credit. If your debt amounts to more than 40percent of income and cannot be paid off within five years, then debt management may be a better option.

There is a debt management plan through a non-profit .

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Frequently asked questions What is debt consolidation?

Debt consolidation combines multiple debts, like high-interest credit cards or loans, into a single payment.

Should I consolidate debt?

A debt consolidation plan could be a good idea when you’re able to get lower interest rates than the one you currently pay for your debts. This could lower interest costs as well as lower the monthly installment or help you pay off debt more quickly.

What effect will consolidating debt have on my credit score?

Your credit score can be affected for a short time when a creditor or card issuer does a hard credit inquiry. But if you pay on time and stay out from debt for the near future the effect may be positive.

What is the term “debt consolidation?

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

Do I need to consolidate my to pay off my debt?

A debt consolidation plan could be an ideal option if you can get an interest rate that is lower than the current rate on your debts. This would reduce interest costs as well as lower the monthly installment or allow you to pay off debts faster.

How will consolidating debt affect my credit score?

Your credit score could temporarily dip when a lender or credit card issuer makes a hard credit inquiry. However, if you pay your bills punctually and remain out from debt for the near future the effect may be positive.

Authors’ Bios Steve Nicastro is a former NerdWallet authority on personal loans and small business. The work of Steve Nicastro has been featured in The New York Times and MarketWatch.

Jackie Veling covers personal loans for NerdWallet.

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