How to consolidate credit card debt: What are your options?

You consolidate credit card debt by taking out one new loan or credit account and using it to pay off your card balances, ideally at a lower interest rate than the cards charge. Personal loans and balance transfer credit cards are both popular ways to consolidate credit card debt. If you have enough home equity, a home equity loan or home equity line of credit (HELOC) are also debt consolidation options.

Four cards mean four due dates at four interest rates. Even on autopay, that takes attention every month, and the highest-rate balance is not always the one you notice. Consolidation replaces the whole arrangement with one payment on one date. Whether it also lowers your cost depends on the rate and the term you get.

Your options to consolidate credit card debt

You could consolidate credit card debt with a personal loan, home equity loan or HELOC, or balance transfer. The right fit depends on your financial situation and how long you need to pay off your credit card debt.

Personal loan

A personal loan is an installment loan you repay in fixed monthly payments over a set term. Most personal loans are unsecured, meaning you don’t need to put up any collateral. Lenders evaluate your loan application based on your credit history, income, and debts.

When you’re approved for a personal loan, the lender sends you the funds. You can then use those funds to pay off your credit cards, and you just need to repay the lender going forward. Some lenders also provide the option of paying off creditors directly for you.

The rates lenders advertise go to applicants with the strongest files, so treat any advertised number as a floor rather than a forecast. Many lenders charge an origination fee, typically 1% to 10% of the loan amount. Lenders normally deduct the origination fee from the loan amount upfront, so that’s something to factor into the amount you borrow. If you apply for exactly what your cards total, a fee could leave you short of covering every balance. Applying for a bit more could close that gap.

Verify four points before you sign the loan documents:

• Does the rate stay fixed for the full term?

• How does the lender charge its origination fee?

• Does the rate beat the blended rate across the cards you're replacing?

• Are there any prepayment penalties?

Shorter terms cost less in total interest and carry higher monthly payments. Personal loan terms vary by lender, generally ranging from two to seven years.

Home equity loan or HELOC

A home equity loan uses your home as collateral. Your borrow against your home equity, the difference between what your home is worth and what you still owe on your mortgage. You receive a lump sum at closing, usually with a fixed rate and payment amount.

A HELOC is also secured by your home. With a traditional HELOC, you can borrow, repay, and borrow again up to your credit limit during a draw period. The draw period is followed by a repayment period when you can’t borrow any more money from your HELOC. Terms vary by lender, so confirm how a given HELOC is structured before you commit. Most HELOCs have variable interest rates that can change over time. Achieve Loans is an exception, as it offers a fixed-rate HELOC.

Repayment terms usually stretch longer than personal loan terms. A longer term lowers your monthly payment and could raise what you pay overall. Because HELOC structures differ by lender, ask how your payment is calculated, including whether it can change over time, before you commit.

Balance transfer

A balance transfer moves your existing card balances onto a new card, usually one offering a low or 0% rate for a promotional period. The issuer typically charges a balance transfer fee, with the standard amount being 3% to 5%. The balance transfer fee is added to the amount transferred. For example, if you transfer $5,000 to a card with a 3% balance transfer fee, the fee would be $150, and the total amount transferred to the card would be $5,150.

When the introductory period ends, the card’s regular rate applies to any remaining balance. Confirm how long that window runs. Many balance transfer cards have a 0% introductory APR lasting for 12 to 21 months.The introductory rate may or may not apply to new purchases made on the card, depending on the terms. Aim to pay off the full balance before the introductory period ends and the interest rate increases.

While making payments on time is always important, that’s especially true with balance transfer cards. If you’re more than 60 days late on a payment, the card issuer could raise your rate on every balance you carry, including balances you’ve transferred. In this situation, you’d lose the low introductory rate, the main reason to bring over your balances in the first place.

How to consolidate credit card debt on your own

You can consolidate credit card debt yourself by following these steps:

1. List every balance and its rate. Write down the balance, annual percentage rate, minimum payment, and due date for each card. This breakdown becomes your baseline.

2. Calculate what you pay now. Add the balances together to get your total. Then work out the blended rate: Multiply each card’s balance by its rate, add those results, and divide by the total. Your largest balances pull the blended rate toward their own rates. Any consolidation option has to at least beat the blended figure to lower your interest cost. Test the term, too. A smaller monthly payment stretched over more months could still cost more overall, even at a lower rate.

3. Match the options to your situation. Homeowners with enough equity have access to home equity products that renters do not. A balance transfer only helps if you’re approved for enough credit to cover your balances and you could clear them within the introductory window. Evaluate which option is right for you by comparing offers on APR, total repayment cost over the full term, and the monthly payment amount.

4. Prequalify with a soft credit check. A soft credit check allows a lender to conduct a basic review of your credit without affecting your score. Prequalifying shows the terms a lender might offer. It isn’t an approval, and the final offer could change after the lender reviews a full application.

5. Apply for an offer and pay off your cards. Unlike a prequalification, a full application normally involves a hard credit check, which has a small impact on your credit. If you’re approved, use the loan or credit account to pay off your credit cards, and keep those cards at zero. Once those old cards are paid off, you only need to make one payment on the new account each month.

How to consolidate credit card debt and protect your credit

Credit scoring models weigh these factors:

• Payment history

• How much you owe against your limits, primarily your credit utilization

• Length of your credit history

• New credit

• Mix of account types

Consolidation can potentially affect all of these factors. Most of the impact comes in a few important places.

Short-term dip: Applying creates a hard inquiry. A new account lowers the average age of your accounts. Both factors could cause a small dip in your credit score. A hard inquiry affects your FICO Score for 12 months. Avoid applying for new loans or credit cards after consolidating debt, and it shouldn’t take long for your score to recover from the dip.

Mix of account types: If you consolidate debt with a personal loan or a home equity loan, either would add an installment loan to your credit file. If you previously only had credit cards, an installment loan diversifies your mix of account types. This might raise your credit score.

Credit utilization: Your credit utilization, which is your credit card balances divided by your credit limits, should go down if you consolidate with a personal loan or a loan against your home. Lower credit utilization is good for your credit score. If you pay off your credit cards with a personal loan, home equity loan, or HELOC and your credit card balances drop to zero, your utilization falls sharply. Installment loan balances don’t count toward credit utilization like credit card balances do.

If you use a balance transfer to consolidate debt to a new credit card, your overall credit utilization decreases. The balance transfer card’s credit limit adds to your total credit. However, your utilization on the balance transfer card could be high. Pay down the balance and your score might improve, as long as you don’t run up balances on your other cards.

Payment history: Payment history is the most important factor in your credit score. Consolidating credit card debt could make it easier to stay on top of your payments. Each on-time payment you make toward your debt consolidation loan or balance transfer card is also good for your payment history.

Achieve is not a Credit Repair Organization and does not provide, or offer, services or advice to repair, modify, or improve your credit. 

Is it smart to consolidate credit card debt?

Consolidation could be a smart move if you qualify for a rate below the blended rate across your cards. Running your balances through a debt payoff calculator can show you what you’re working with before you shop for offers. A debt consolidation loan works best alongside income steady enough to cover a fixed payment every month, since an installment loan doesn’t offer the same payment flexibility as credit cards. You also need a plan for keeping your credit cards at zero once you pay off the balances.

It fits less well in other situations. If every offer you receive carries a rate close to what your cards charge, consolidating could end up costing you more because of the fees involved. If the term runs long enough that total interest climbs past what you would have paid otherwise, your lower monthly payment is costing you money.

Although consolidation could lower the cost of your debt, it doesn’t help with a monthly shortfall. If you’re in credit card debt because your expenses are greater than your income, consolidation doesn’t address that.

What’s next?

• Add up the balances you’d like to consolidate.

• Check your rate with lenders like Achieve that use a soft inquiry that doesn’t affect your credit.

• Before you apply, make a plan for avoiding new debt while you pay off the consolidation loan.