How To Consolidate Credit Card Debt the Right Way

Consolidating credit card debt can help you secure lower annual percentage rates (APRs) and get out of debt sooner. The process involves taking out personal loans or a line of credit and using those proceeds to pay off your credit card debt. Consumers have multiple options to pay off credit card balances and make repayment more manageable by restructuring the debt.

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Consolidating Credit Card Debt: At a Glance

If you're comparing your options, it can help to evaluate debt consolidation and balance transfer options side by side.

How To Consolidate Credit Card Debt: Step by Step

Consolidating your credit card debt is a straightforward, 5-step process.

1. List all of your credit cards and balances: Gather all your credit cards and balances to understand how much debt you’re working with and which option may fit best.

2. Check your credit score: Review your credit score through your bank or a credit bureau to see which consolidation options you may qualify for.

3. Choose the right consolidation method: Select the option that offers the lowest interest rate and best repayment terms. Higher credit scores may qualify for balance transfers or home equity loans, while lower scores may limit options.

4. Apply and move your debt: Compare lenders and submit your application. Once you’ve gotten your debt consolidation personal loan or balance transfer, pay off your credit cards.

5. Stick to your repayment plan: Stay consistent with payments and avoid taking on new debt to make the most of your consolidation strategy.

Best Ways To Consolidate Credit Card Debt

Banks and online lenders offer various products that can consolidate credit card debt, but the most common options include balance transfers, personal loans, home equity loans or HELOCs, and debt management plans.

Balance Transfer Credit Card

• Best for: People with good credit scores

• Typical APR range: 0% APR for up to 24 months, then variable rates up to 29%

• All-in costs: 3% to 5% balance transfer fee

• Funding speed and timeline: A few days or weeks, depending on the issuer

• Credit impact: Temporary credit score drop

• Risks and caveats: Risk of high APR if the balance isn’t paid off during the promo period

Personal Loan

• Best for: People who want fixed payments and a defined payoff date

• Typical APR range: 6% to 27%, depending on credit

• All-in costs: Origination fee, typically 1% to 2% of the loan

• Funding speed and timeline: 1 to 7 days, depending on the lender

• Credit impact: Temporary dip in credit score

• Risks and caveats: Origination fees and the potential to take on new debt after paying off the balance

Home Equity Loan or HELOC

• Best for: Homeowners with available equity

• Typical APR range: 6% to 24%, depending on the lender

• All-in costs: Origination fee, appraisal and closing costs — 2% to 6%

• Funding speed and timeline: 2 to 8 weeks, depending on the lender

• Credit impact: Temporary dip in credit score

• Risks and caveats: Risk of foreclosure if payments are missed, plus higher upfront costs

DMP

• Best for: People with bad credit and no clear path to repayment

• Typical APR range: May be reduced from current rates

• All-in costs: Setup fee and monthly service fee

• Funding speed and timeline: 30 to 45 days

• Credit impact: Significant initial decrease

• Risks and caveats: Potential credit score impact and limited access to new credit during the plan

Cost Comparison: Which Option Saves the Most?

Here’s a side-by-side look at how much it would cost to consolidate $10,000 in credit card debt across common options.

• Balance transfer: Can save the most money if you pay off the balance during the 0% APR period, but interest can add up quickly if it lingers afterward.

• Home equity loans: Offer lower interest rates for homeowners with equity, though they often come with higher upfront costs.

• Personal loans: Work well for borrowers with strong credit, but rates can be higher if your credit profile is less favorable.

• DMPs: May reduce overall costs, but are typically a last resort due to strict requirements, lifestyle changes and limited credit access.

Pros and Cons of Debt Consolidation

Before consolidating your debt, it’s important to understand the trade-offs involved:

Pros

• Lower interest rate for your debt

• Break credit card debt into smaller monthly payments with a fixed payoff date

• Group all debt obligations under one balance, making it easier to manage

Cons

• Additional fees will apply

• Can incentivize and enable the bad spending habits that resulted in high credit card debt

• Low credit score will make it more expensive to consolidate and give you fewer options

Should You Close Credit Cards After Consolidating?

Closing credit cards after consolidating can make sense if you have a bad habit of getting into debt and want to give yourself fewer options to borrow money.

However, it is beneficial to keep credit cards open if you need to improve your credit score. Additional cards will boost your credit history and result in a lower credit utilization ratio.

You can also utilize credit card rewards programs, which is a nice perk for people who like to rotate cards to maximize the amount of cash and points back they receive.

When Debt Consolidation Makes Sense

Here are the scenarios where debt consolidation is most likely to work in your favor:

When It Works Best

• You're struggling with high-interest debt.

• You have a decent credit score, so you can qualify for good interest rates.

• You have a steady income and can pay back your loan on time.

When To Avoid It

• Your credit score is too low and you have a hard time opening a new account.

• You don't have a stable income right now — it may still be a struggle to pay back a consolidated loan.

• You're missing or behind on payments and can't afford bills. A DMP may likely be a better option.

Post-Consolidation Plan

This checklist can help you hit the ground running once you receive your loan or balance transfer:

• Use the new loan to pay off your credit card debt.

• Review your past spending and determine how you ended up with significant credit card debt.

• Cancel any unnecessary subscriptions and commit to short-term sacrifices, such as less discretionary spending and picking up a side hustle.

• Commit to your new payment plan and regularly monitor your finances.

Key Terms To Know

• Credit card debt consolidation: Taking out a loan or a line of credit to pay off high-interest credit card balances.

• Balance transfer: Moving the balance from an existing credit card to a new credit card, typically to capitalize on a 0% APR promotion.

• Line of credit: A flexible borrowing option that allows you to draw funds as needed, similar to how credit cards work, and repay over time.

• Personal loan: A lump sum you receive that can be used for credit card consolidation or any other purpose.

• Debt management plan: The last resort for people who are in credit card debt. You will get a lower interest rate, but it’s reserved for people who can demonstrate financial hardship.

• Home equity loan: A financial product that lets you tap into home equity.

Debt Consolidation FAQs

Still have questions about consolidating credit card debt? Here are answers to some of the most common ones:

What’s the smartest way to consolidate credit card debt?

The smartest way to consolidate debt depends on your finances. One of the best ways is to open a balance transfer credit card that offers 0% intro APR for 1 to 2 years. If you don't think you can pay it off in that time frame, a personal loan with fixed monthly installments is often the way to go.

How long does debt consolidation take?

Consolidation can take a few days or a few months, depending on the method you use and which options are available to you.

Do personal loans have prepayment penalties?

Some lenders have prepayment penalties on their personal loans. It’s good to check the terms and conditions before committing to a personal loan.

Should I keep my cards open after consolidating?

Keeping your credit cards open will improve your credit utilization ratio and credit history, which can translate into a higher credit score. However, you should close your cards if keeping them open makes you more likely to spend money that you don’t have.

Can I consolidate with bad credit?

If you have bad credit, you may only be able to consolidate your credit cards with a debt management plan. Some personal loans may be available, but you will have to contend with higher interest rates.

Sarah Hostetler contributed to the reporting for this article.

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