Millions of Americans are still in slow motion with credit card debt. According to the Federal Reserve Bank of New York, Americans had $800 billion of credit card debt as of the third quarter of 2021. 3.2% of this pile was going into major delinquency. It can be hard to catch up with payments once you are behind due to the high-interest rates on credit cards.
Debt consolidation is a way to combine your credit card balances into one monthly installment, usually with a lower interest rate. We’re happy to walk you through a variety of consolidation strategies.
1. Transfer card for balance
For those with excellent credit ratings who can repay their debt in 1-2 years, this is the best option
The main benefit of a balance transfer credit card is that it consolidates all your credit card debt into one card. Many balance transfer cards will offer a 0% interest rate for 12-24 months. This allows you to reduce your debt faster and not worry about interest. When transferring large amounts of balance, balance transfer cards can charge fees. These fees are typically between 3% and 5%.
Lock in 0% or lower introductory APR for one year or more
Some cards have a long introductory period, sometimes up to 24 Months.
Balance transfer fees for cards with low intro APR or none charge balance transfers between 3% and 5%
If the balance is not paid off within the promotional period, it can lead to higher interest rates and more debt.
To qualify for 0% APR, you will typically need to have excellent credit.
2. Debt consolidation loan
For those with high debt levels
A debt consolidation loan, an unsecured personal loan, offers a fixed interest rate that is lower than credit card APRs. It also has a longer repayment term. This loan is a good option for people who are unable to qualify for a balance transfer card that offers a 0% introductory rate. Prequalification for a consolidation loan can be done without impacting your credit score. This will allow you to decide if consolidation is right for you.
Online lenders, banks, credit unions, and credit unions all offer debt consolidation loans. Credit union debt consolidation loans usually have lower interest rates and flexible loan terms than other lenders. You can shop around for debt consolidation loans to find the best terms for your debt situation.
Fixed repayment schedule
Paying off debt takes longer
You may be eligible to prequalify, without having to affect your credit score
Lower interest rates than other credit cards
You can get a consolidation loan for debt with credit less than perfect
To qualify, you must meet the requirements of each lender
Some loans for debt consolidation come with an origination fee
Your credit score is what determines your interest rate
3. Refinance, home equity loan, or home equity line credit (HELOC).
For homeowners with average to fair credit
To consolidate debt, homeowners can take out a home equity loan or line of credit. A home equity loan is a second mortgage that you take against your equity. It provides a lump sum and a fixed rate of interest. The home equity line or HELOC is also based on your home’s equity. However, it works more like credit cards and offers you a revolving credit that you can access whenever you need. A HELOC will only allow you to pay the amount borrowed plus any interest. You can also use a cash-out refinance if the equity in your home is sufficient to convert your credit card debt to a lower interest rate.
Although a home equity loan or HELOC may be able to help consolidate debt, there are greater risks. If you default on one, your home could be taken away by the lender. This can be an option for homeowners who have equity in their homes and can keep the loan paid off on time.
A personal loan typically has lower interest rates.
You may be eligible for higher terms even if you don’t have good credit
You will pay lower monthly payments over a longer repayment term.
To qualify, you must have equity in your house
Additional fees may apply, such as an appraisal or closing fee.
You could lose your home if the loan is not paid on time
4. Credit counseling/debt relief programs
For those who don’t meet the requirements for most debt consolidation options
Credit counseling can help you understand your finances, and explain how you got into credit card debt. You can also get help with creating a plan to repay your debts. This may include a consolidation program. Many nonprofit credit counseling agencies offer their services free of charge or for a small fee. Credit counselors are also available to help you negotiate lower interest and fees.
A debt consolidation program requires you to pay one monthly fee. This is divided and sent out to your creditors. The debt consolidation program doesn’t affect your credit score, and it may be a good option for those who aren’t eligible for other consolidation options. Many credit counseling scams are available online. Make sure you thoroughly vet any company before making any payments. When interviewing credit counseling companies, the FTC offers a useful checklist.
Credit score won’t be negatively affected
You can reduce interest rates and fees
Fixed monthly payments
For those with less favorable credit
If you work with a non-profit organization, service may be required, and monthly fees.
It could take years to repay debt
While you are managing your debt, credit usage could be frozen
5. 401k Loan
Best as a last resort
You may be eligible to borrow up to 50% of your existing balance if you have a company-sponsored retirement plan, such as a 401(k). This loan does not require a credit check and can have interest rates that are lower than other debt consolidation options. A 401(k), usually has a five-year repayment plan. However, the total loan amount and interest will become due if your job is lost or terminated.
Although taxes are not due on a 401k loan that has been repaid, it could be considered taxable income if the loan isn’t repaid. You’ll have to pay taxes as well as early withdrawal penalty fees.
Lower interest rates
Credit score has no effect
Five-year, fixed repayment schedule
May lower your retirement income
If you are unable to repay, you will be subject to penalties and taxes
If the employer is not present, the full amount becomes due
Limits on how much you can borrow