Credit Card Debt Consolidation: Best Ways to Consolidate

For many Americans, the biggest financial threat they're facing is being weighed down by massive credit card debt – a problem that's only gotten worse due to the COVID-19 pandemic. According to the Federal Reserve, total U.S. household debt has ballooned to a staggering $17.5 trillion, with over $1 trillion of that being straight-up credit card balances alone. On average, people were carrying around $7,932 in credit card debt in 2023 - way higher than the $6,321 average just the year before.

Compared to other types of debt, Americans seem to really struggle the most with paying their credit cards on time. Over 6% of all credit card balances are seriously delinquent and behind on payments. Making that hole even deeper to climb out of, credit card interest rates have skyrocketed nearly 30% higher in just the last year and a half alone.

With credit card debt continuing to pile up for millions, more and more people are looking into options for consolidating all those balances in order to hopefully pay everything off for good.

This article provides a complete guide to credit card debt consolidation - explaining exactly what it is, when it makes sense to consider it, the best ways to consolidate, and how to actually go about doing it. It breaks down the pros and cons of consolidating while giving advice on choosing the right consolidation solution based on your specific financial situation.

What Is Credit Card Consolidation?

Credit card debt consolidation is a popular credit card debt relief option. It helps you combine multiple credit card accounts with various due dates and interest rates into one manageable monthly payment. Credit card consolidation simplifies your credit debt repayment without hampering your credit score. It may also reduce your interest rates and save money over time.

Consumers usually take out a loan or line of credit to consolidate debt. They can borrow a personal loan, use a balance transfer credit card, take out a home equity loan, or other options.

Each credit card debt consolidation technique has pros and pitfalls.

Some popular consolidation options are:

Personal Loans Or Debt Consolidation Loans

By using this strategy, consumers may consolidate debt and pay off credit cards faster. They can borrow low-interest personal loans, also known as credit card consolidation loans, and pay off unpaid credit cards entirely. People can get credit card debt consolidation loans from banks, credit unions, and payday loan lenders.

Credit Card Balance Transfer

Consumers can get a balance transfer credit card at 0% APR and transfer outstanding credit balances. This way, they can minimize interest payments and pay off credit cards faster. The reduced interest rate for most balance transfer cards is temporary. Your new credit card's interest rate may increase after the introductory period. You may also need to pay a balance transfer fee on the transferred money.

Home Equity Line Of Credit Or HELOC

You may borrow money by taking out a home equity line of credit or (HELOC). By using that fund, you can consolidate credit card debt. Home equity loans charge lower interest rates than other conventional loans. But usually, finance experts do not suggest this option.

Turning your unsecured debts such as credit card debts into secured debt such as HELOC is harmful to you. If you forget to repay the loan, your house may face foreclosure. You might also be charged closing costs, probably a few hundred or thousands of dollars.

401(K) Loans

Consumers may also opt for a credit card debt consolidation strategy if they can get a 401(k) loan. 401(k)s are qualifying retirement investment accounts with pre-tax paycheck deductions. The maximum loan amount permitted by the IRS is $50,000 or 50 percent of the vested account balance, whichever is less. Old 401(k)s don't count.

Usually, 401(k) loans offer lower interest rates than credit cards and personal loans. 401(k) loans are secured by retirement assets. As a result, they are easy to approve without any credit check. Most 401(k) loans must be repaid in five years. If the employee leaves his/her job, the loan will be due within 60 days.

Debt Management Programs

Non-profit credit counseling agencies and other credit card consolidation companies provide credit debt consolidation programs. They help consumers and creditors set up a repayment plan with lower interest rates and no fees.

To choose the best way to consolidate credit debt, consider your financial condition, credit score, and long-term goals.

When researching credit card consolidation programs, choose one that helps lower your monthly income.

When Is It Good To Consolidate Your Credit Cards?

Consolidating your credit cards can be a smart move if:

1. You've got a steady income coming in and a solid credit score
   • Having reliable income and good credit is necessary to qualify for the best consolidation loan deals and 0% balance transfer card offers.
   • Take an honest look at your financial situation, and consider talking to a credit counselor or money expert for guidance.
2. You're dealing with high-interest rate credit card debt
   • Consolidation helps by potentially lowering that interest rate, which can save you tons of money on interest charges.
   • For example, if you've got $15,000 in card balances at 20% APR on average, a 0% balance transfer card or low-interest personal loan could provide huge savings.
3. Juggling multiple credit card payments is becoming a nightmare
   • Dealing with different due dates across various cards makes it way too easy to accidentally miss payments and rack up fees.
   • Consolidating rolls multiple card payments into one simplified monthly payment.
4. You want to get that credit card debt paid off faster
   • With a lower interest rate from consolidation, more of your payment goes toward the actual principal balance.
   • Making consistent payments on the consolidated debt can help you become debt-free much quicker while saving money.
5. You're sick of dealing with abusive debt collectors and potential lawsuits
   • People with large unpaid card balances frequently get harassed by shady collectors and face threats of lawsuits.
   • Consolidating wipes out those individual credit card debts, stopping the harassment and legal threats.

When Is It Not Good To Consolidate Credit Card Debt?

You probably shouldn't consolidate those credit cards if:

1. Your debt-to-income ratio is just way too high
   • If your total monthly debt payments (including rent/mortgage) make up over 50% of your monthly income, you likely won't qualify for a consolidation loan or 0% balance transfer card.
2. You only have one credit card bill with a small remaining balance
   • If it's just a single card with a low balance that you can reasonably pay off within a few months, going through consolidation might not be worth the hassle.
3. You're almost done paying off your debts already
   • If any balance transfer fees or loan origination fees outweigh the amount you actually owe, or if you can realistically be debt-free within 6-12 months, consolidation may end up costing you more.
4. You haven't addressed the root cause of your debt issues
   • Consolidation helps manage existing debt better, but it doesn't fix the underlying issues like overspending or poor money habits that got you into debt in the first place. Addressing those root causes is key.
5. Your credit score is just plain bad
   • Credit scores below 580 make it really tough to qualify for the best consolidation options with low interest rates. With a high APR loan, you won't save much on interest at all.

Pros and cons of credit card consolidation

Top 10 states with the highest credit card balance

*Data Source - CNBC

Top 10 states with the lowest credit card balance

*Data Source - CNBC

Is A Credit Card Consolidation Loan A Good Idea?

Whether a consolidation loan is a smart move for your credit card debt really depends on your specific money situation and goals. Here are some key things to think about:

1. Total Card Debt Amount: If you're dealing with a mountain of maxed-out credit cards, a consolidation loan can potentially help get that under control. But if the total balance is relatively low and manageable, taking out another loan may be overkill.
2. Interest Rates: Compare the interest rate on a prospective consolidation loan against the rates you're currently paying on cards. If the loan rate is way lower, it could save you hundreds or thousands by reducing overall interest costs.
3. Fees Involved: Make sure to factor in any upfront origination fees or annual fees on the consolidation loan itself. Do the math to ensure the loan fees don't negate any interest savings.
4. Credit Score Impact: Applying for a new consolidation loan does result in a credit check that can temporarily ding your score a bit. However, making on-time payments and reducing your debt-to-credit ratio can help rebuild your score over time.
5. Repayment Schedule: Look at how long the loan repayment timeline is compared to your income, budget, and bigger money goals. A longer loan term means lower monthly payments, but you'll pay way more total interest in the long run.

How to Get a Debt Consolidation Loan

Scoring a debt consolidation loan involves a few key steps:

1. Check your credit score: Review those credit reports from the 3 main bureaus and fix any errors. Your credit profile determines what loan options you'll qualify for.
2. Prepare application documents: Gather things like pay stubs, W-2s, bank statements, and tax returns. Having this paperwork ready makes applying smoother.
3. Shop around for the best offers: Compare rates and terms across different banks, credit unions and online lenders. Read the fine print carefully on interest rates, loan lengths, fees and total costs.
4. Secured vs. unsecured loans: Secured options like home equity loans tend to have lower rates but require putting up collateral like your house. Unsecured personal loans don't need collateral but charge higher interest.
5. Get recent payoff amounts: Request updated payoff statements from your creditors showing current balances and unpaid interest.
6. Seek professional advice: Consider talking to a legitimate credit counselor or financial advisor to review everything and assess any potential risks.
7. Submit applications: Once you've compared offers, submit your application to the lender with the best loan option for your needs.
8. Receive loan funds: If approved, the lender pays out the loan amount. Some will pay your creditors directly, others require you to do it yourself.

Keep in mind that banks and credit unions tend to have stricter requirements like good-to-excellent credit scores and lower debt-to-income ratios below 36%. Online lenders may be more flexible on criteria but charge higher rates to higher-risk borrowers. Peer-to-peer lenders are another option with varying requirements and competitive rates, but loans usually average 3-5-year terms.

Why shouldn’t you use secured loans as credit card debt consolidation loans?

Secured loans offer lower interest rates than unsecured loans. However, using secured loans has risks:

• The lender may foreclose on your home if you can't make the loan payment.
• If your home's value drops, you might have to pay more than you owe.
• It will also be difficult to refinance.
• Associated costs such as closing costs, appraisal fees, and other fees may increase the overall cost of borrowing.

Does Credit Card Debt Consolidation Hurt Your Credit Score?

Consolidating your credit card balances can actually help or hurt your credit score depending on the method you use and how responsible you are with payments afterward.

Potential Positive Effects:

1. Making All Payments On-Time: Consistently paying that consolidated debt payment on time every month can gradually improve your credit over time.
2. Lowering Credit Utilization: If consolidating allows you to pay off and eliminate those maxed-out credit card balances, it reduces your overall credit utilization ratio which can boost scores.

Potential Negative Effects:

1. New Credit Inquiries: Applying for a new consolidation loan or balance transfer card leads to a hard credit inquiry that temporarily lowers your score a bit.
2. Younger Average Age of Accounts: Opening a new consolidation account reduces the overall age of your credit accounts, which can negatively impact scores.
3. Missed Consolidation Payments: If you fail to make timely payments on that consolidated debt, those late marks will get reported and trash your credit.

To minimize any credit score damage from consolidating:

• Apply for rates from multiple lenders within a short 14-45 day window to bunch hard inquiries.
• Keep paid-off credit cards open to preserve your accounts' average age and low utilization.
• Make that consolidated payment a top priority - on-time payments help rebuild credit.
• Avoid using remaining credit cards to prevent accruing new balances on top of consolidated debt.

How can you choose the best credit card consolidation companies?

You should evaluate all the credit card consolidation companies. Factors to consider:

These are the red flags that you must check in credit card consolidation companies:

No accreditation

Check the company's BBB or NFCC accreditation. If the company has poor accreditation or low ratings, you should avoid it. You should also consider negative online reviews and testimonials of unsatisfied clients, if any.

Missing transparency

If a company does not maintain transparency on its fees, process, or terms, it might be a red flag. Check the company's service history and track record. If you find negative information, it is better to look for other companies.

Charging upfront fees

If the company charges upfront fees before giving any services, avoid it ASAP. Genuine debt consolidation companies do not charge any upfront fees.

Makes False Promises or guarantees

You should avoid those companies who make false promises. For example - Avoid companies who promise to improve your credit by deleting bad items from your credit report.

Use Forceful tactics

Avoid companies that force you to choose a consolidation option without analyzing your financial condition. A reputable consolidation company will give you the option to choose at your convenience.

Can You Still Use Your Credit Card After Debt Consolidation?

When you sign up for a credit card consolidation plan or debt management program, the credit card companies will likely freeze your accounts to prevent any new purchases or charges. They do this because they're already cutting you a break by lowering your interest rates, so the goal is to help you kick the credit card dependency habit.

If you consolidate your card balances through a balance transfer or personal consolidation loan, your credit cards will be paid off and show a zero balance. At that point, you've got the option to either keep those credit card accounts open or go ahead and close them out. Each choice has its own pros and cons:

Credit Card Debt Consolidation with Bad Credit

It is possible to consolidate credit card balances even if your credit isn't in great shape. Here are some potential options:

1. Secured Personal Loans
   • These require putting up collateral like a vehicle or savings account
   • You'll get lower interest rates than an unsecured loan
   • But there's a risk of losing that collateral if you don't repay the loan
2. Cosigned Personal Loans
   • You'll need someone with good credit to cosign and share responsibility
   • Allows you to access better rates and terms
   • But the cosigner is on the hook if you miss payments, impacting both credits
3. Peer-to-Peer Lending
   • Easier to qualify for with poor credit
   • But interest rates are typically higher to compensate for the risk
   • May have higher fees than traditional loans
4. Debt Management Plans
   • Offered through non-profit credit counseling services
   • Counselors negotiate lower rates/fees and a structured repayment plan
   • You make a consolidated payment to the agency each month

Some limitations of consolidating with bad credit:

• You'll face higher interest rates since you're a bigger default risk
• Repayment timelines may be shorter, resulting in higher monthly payments
• Many lenders may just outright deny applications due to poor credit
• Further missed payments will continue damaging your credit

While not ideal, consolidating credit card debt is still possible with poor credit, but requires research to find the best "bad credit" option that fits your situation and budget. Being aware of the costs and risks is important.

Can You Lose Your House Due to Credit Card Debt?

Credit card debt is considered unsecured debt, which means it's not directly tied to your house or other major assets. So in general, you won't lose your home solely because of unpaid credit card balances. However, there are some specific situations where your home could potentially be at risk:

1. Lawsuit and Judgment: If you fail to pay your credit card debt, the credit card company may sue you. If they win, the court issues a judgment against you requiring you to pay up.
2. Judgment Lien: After getting a judgment, the credit card company can then file a lien on your home. This gives them a legal claim and secures their interest in your property.
3. Foreclosure: If you still don't pay off that judgment lien, the creditor may ultimately be able to foreclose on your home to get their money. However, they're more likely to first go after garnishing wages or bank accounts.

Using secured loans to pay off credit cards can also put your house in jeopardy:

1. Home Equity Loans/HELOCs: These loan types are secured by your home's equity as collateral. If you default on one of these loans used to pay credit cards, the lender can foreclose.
2. Cash-out Refinance: This replaces your mortgage with a bigger loan amount to pull equity out (potentially to pay credit cards). If you can't make the new bigger mortgage payment, foreclosure is possible.

How can you consolidate credit card debt on your own?

There are a few other ways to consolidate credit card debt besides the popular options like personal loans, balance transfers, and home equity loans that we've already covered.

Borrowing From Life Insurance

• If you have a cash-value life insurance policy, you can borrow against the built-up cash value.
• These policy loans tend to offer pretty low interest rates and don't require monthly payments.
• The downside is any outstanding balance gets deducted from the death benefit payout.
• You can potentially withdraw funds without paying the loan back.
• But you need sufficient cash value to cover the loan amount plus policy fees/charges.

You can also just straight-up cancel or cash out the life insurance policy to get the full remaining cash surrender value. But then you lose the death benefit coverage and may owe taxes on that cash payout.

Borrowing From Retirement Accounts

• You can take out a loan against funds in retirement accounts like 401(k)s
• If the 401(k) loan isn't repaid within 5 years, it triggers taxes and early withdrawal penalties
• Loan amounts are limited to the vested balance, up to $50,000 max
• If you leave or lose your job, you have 60-90 days to pay the full balance
• Otherwise, it counts as an early withdrawal subject to taxes/penalties
• Loans repaid with after-tax dollars get taxed again upon withdrawal in retirement

Cash-Out Auto Refinance

• This refinances your existing car loan into a larger new loan amount
• Allows you to pull out the car's equity in cash, potentially to consolidate debt
• The downside is if the car's value depreciates, you could end up with negative equity

So in a nutshell, those are some alternative consolidation methods involving tapping different assets you may have like life insurance cash values, retirement funds or a car's equity. But they all come with their own risks and downsides to consider.

What are the other ways to reduce credit card debt without consolidation?

Alternatives to Credit Card Debt Consolidation

There are several different routes you can take to tackle credit card debt without necessarily consolidating:

1. Debt Snowball Method: Focus on aggressively paying off your smallest credit card balance first while just covering the minimum payments on all the other cards. Once that little debt is gone, you "snowball" those payments towards knocking out the next smallest balance, and so on.
2. Debt Avalanche Method: Rather than going smallest-to-largest, you prioritize paying off the card with the highest interest rate first while still making minimum payments on the rest. It may take longer, but you'll save more by clearing that expensive debt sooner.
3. Debt Settlement: Here you work with negotiators who have you set aside a specific amount of money each month into an escrow account. Once enough has accumulated, they'll try to negotiate with your creditors to accept a lower lump-sum payoff amount.
4. Debt Management Plan: With this option through non-profit credit counseling agencies, counselors will create a structured repayment plan for you and try to get creditors to reduce interest rates. You just make one consolidated payment to the agency.
5. Bankruptcy: This is considered an absolute last resort. With Chapter 7, declared assets get liquidated to pay creditors. Chapter 13 involves a court-approved repayment plan over 3-5 years.

Each of these debt elimination methods has its own pros and cons. The ideal choice really depends on your unique financial situation and goals. It's wise to review all options carefully and consider getting professional financial guidance before deciding on a debt reduction game plan that's right for you.

Conclusion

Consolidating your credit card debt can definitely be an effective way to simplify those payments and potentially save some money on interest. But it's super important to carefully weigh your options and understand all the potential risks and benefits before pulling the trigger.

When deciding if consolidation is the right move for your situation, think about key factors like your total debt amount, current credit score, interest rates on those card balances, and your ability to consistently make payments on time going forward. Be aware that consolidation may impact your credit score temporarily, and have a solid plan to avoid racking up new debt on top of the consolidated balance.