How to Consolidate Credit Card Debt

Consolidating your credit card debt can lead to big savings. Instead of paying high-interest rates and making multiple payments each month, you can get a lower rate and pay off your debts with one monthly payment. Not sure where to start? Here's how to consolidate, step-by-step:

  1. Give your credit a check-up
  2. Find the best loan
  3. Apply for loans
  4. Pay off your debt and prevent it from coming back

Credit card debt is one of the most expensive types of debt. Especially if you only make the minimum payment, you’re barely making a dent in your loan balance, and it can be hard to keep your head above water.

That said, consolidation isn’t the only way to pay off credit cards – it’s just a strategy that might help you simplify and save money. If you prefer, you can use different strategies like the “debt snowball” or the “debt avalanche” instead.

Before you start the process of consolidation, make sure it really makes sense. You might end up hurting your credit or spending more money than you would if you just paid off your cards. Consolidation makes the most sense when:

  • You can’t pay off your credit cards quickly (if you can pay everything off within six months or a year, a balance transfer might make more sense)
  • You can qualify for another loan
  • You’ll get a lower interest rate on the new loan

It’s a good idea to figure out how much you’ll really save if you consolidate your credit cards. Take a look at how quickly you’ll pay down those cards if you make the minimum payment (and what happens if you pay a little extra). For a basic example, see how to calculate credit card payments. Then, run some numbers on your new consolidation loan to see how it compares: how much will you save on interest, and will your savings be eaten up by fees?

If the numbers look good, it’s time to get started.

Check Your Credit

Credit Meter
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Before you apply for a loan, get familiar with your credit. Get a copy of your credit report (it’s free for all US consumers) and read through it carefully. There are two reasons to review your credit:

  • You want to know where you stand—if you have good credit or bad credit
  • You need to fix any errors in your credit reports to get approved for the best loans

For most consolidation loans, your credit is important. Lenders will evaluate whether or not you’re likely to repay a loan. They do this by looking at credit scores, and by calculating how much of your monthly income is available to pay off your debts.

If your credit and income are not high enough, you’ll have a hard time getting approved, and if you are approved you might pay higher interest rates (which doesn’t improve your situation much). There are two ways to overcome those challenges:

A cosigner can apply for the loan with you. Lenders will consider that person’s credit and income as well as yours, and the cosigner will be 100 percent responsible for repaying the loan if you stop making payments. Cosigners are taking a huge risk, and some people can’t afford to take that risk, but if you’re fortunate enough to have a cosigner available, you might get better terms on a loan.

Pledging collateral is another option. Instead of relying on your credit and income, lenders can get their money back by taking something you own (the collateral). For example, if you pledge your car as collateral and then start missing payments, your lender can repossess your car, sell it, and collect what is owed. This is risky, and we'll discuss the risks (and better alternatives) next.

Pick the Right Loan

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There’s no single type of consolidation loan for paying off credit cards. Consolidation is simply the act of bundling multiple loans into one single loan. So what type of loan is best?

If possible, always go with unsecured personal loans that have a fixed interest rate. These are loans that you get based on your credit and income. You don’t need to pledge collateral, so your lender cannot take anything from you if you’re unable to repay the loan. Lenders can report that you’ve missed payments, which will hurt your credit, but they generally can’t force you out of your home through foreclosure or take your vehicle.

Your credit card debt is personal unsecured debt already, and it’s best to keep it that way. If you switch to a loan that is secured by collateral, you’re increasing your risk – and you'd need a good reason to take that risk.

Start by shopping for unsecured loans from a variety of lenders. Compare the terms, and go with the best deal.

Online loans often come from non-bank lenders (including peer to peer lenders). They’re usually less expensive than loans from banks, the application process is easy, and approval decisions come quickly. Include a few of these lenders in your list.

Credit unions and banks might also meet your needs—you never know until you ask. In particular, a credit union might give you the opportunity to sit face to face with a lender and discuss your situation. Smaller institutions are more likely to approve loans on attractive terms even if you don’t have perfect credit.

Balance transfer offers are another option. If you have good credit, you probably get several of these offers per year. The idea is that you open a new credit card account with a low-interest rate (0% APR, for example) for six to twelve months. After the promotional period, you’ll pay “normal” credit card rates. But if you’re able to pay off your debt before the promotion ends, balance transfers are a good deal. Note that it’s best if you can pay off your debt with just one transfer—“surfing” from offer to offer is risky.

Second mortgages might work for homeowners. If you have substantial equity in your home, you can borrow against that equity with a second mortgage. However, this is extremely risky—you’re putting your home on the line because the home must be pledged as collateral. If you don’t make your payments on time, you could be forced out of your home through foreclosure.

Apply for Loans

Shark in the Water
Malte Mueller/Getty Images

Once you’ve picked the best type of loan, start filling out applications.

Protect Your Credit

If you’re going to apply for more than one loan (perhaps you want to try different types of loans or shop among competing lenders—which is a good idea), complete all of your applications within a relatively short time frame. Every time you apply for a loan, the lender checks your credit, which creates an inquiry in your credit reports. Too many inquiries make it look like you’re having a hard time financially, and they can bring down your credit score. However, educated consumers shop around before they borrow, so it doesn’t hurt your credit if all of those inquiries happen within 30 days or so.

What about lenders who promise to approve anybody, regardless of credit? Steer clear. There’s no way you’re going to get a good loan without a credit check.

Protect Yourself

Be sure to stick with reputable lenders. When you apply for a loan, you provide sensitive information such as your Social Security Number and date of birth. Those items can be used for identity theft, so you’ll only want to hand those details over to a trustworthy company. Research lenders online, and make sure any web pages you work with are encrypted.

Some “lenders” aren’t interested in stealing your identity—they just want your money. Beware of debt consolidation services that require steep fees or ongoing service charges. As described on the previous page, a standard loan from a bank, credit union, or online lender is your best bet.

Note that some “debt consolidation” services won’t really consolidate debt. Instead, they’ll negotiate with your creditors and possibly handle payments “for you.” While some of those debt management services are legitimate, they’re not the same as consolidation.

Finally, remember that federal student loans have certain benefits that other lenders cannot offer. If you switch out of federal loans for a private lender, you risk losing some of those benefits.

Pay Off Cards and Keep Them Paid Off

Frozen Card
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Once your loan is funded, send that money to your credit card company immediately. It can be tempting to spend what seems like free cash—but the reality is that you’re deeper in debt than you were before.

After you pay off your credit cards, avoid racking up debt on those cards. You’ll suddenly have a zero (or low) balance, so it might seem like you can spend freely. Again, you haven’t really paid off any debt—you only shifted it to another place.

Do whatever it takes to prevent spending with those cards: freeze them in a block of ice or send them through the shredder if you must. Delete or forget your card numbers so you can’t shop online.

Plan Ahead

Of course, the main cause of debt is not the cards—it’s spending more than you can afford. Before you consolidate your credit cards, make a plan so that you don’t wind up in the same position:

  1. Figure out exactly how much you earn and “take home” after taxes and other deductions from your pay
  2. Track your expenses so you know how much you spend, and (more importantly) where the money goes every month
  3. Prioritize your expenses, being sure to “pay yourself first
  4. Keep an adequate emergency fund so surprises don’t tempt you to use credit cards
  5. Make cuts where they’re needed

You want to hit the ground running—with good habits and systems already in place—not scramble to catch up.