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How To Consolidate Your Credit Card Debt

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Richard Barrington
UpdatedJun 14, 2024
Key Takeaways:
  • Credit card debt consolidation makes sense if you can get a lower interest rate, reduced monthly payment, or both.
  • There are many products to consolidate credit card debt, including balance transfer card, HELOC, second mortgage, personal loan and 401(k) loan.
  • Do not take out a debt consolidation loan if you have a spending problem or you’ll end up even deeper in debt.

Credit card debt consolidation can reduce the interest rate you pay on your credit card balances, help you pay off debt faster, and/or lower your monthly payments.

Common debt consolidation loan options include the personal loan, HELOC, second mortgage (home equity loan), 401(k) loan, and credit card balance transfer. You could also choose to liquidate assets or budget to pay down the debt faster. 

This article will explain some of the basics of credit card debt consolidation, and describe the various consolidation loan options that may be available to you. 

What Is Credit Card Debt Consolidation?

Credit card debt consolidation means replacing the balances you owe on multiple credit cards with one new source of debt

The longer you carry a balance on a credit card, the more it costs you. If you can’t simply sell assets to pay off that debt immediately, it makes sense to restructure the debt so it’s more manageable. 

Credit card debt consolidation is one way to restructure that debt. It means borrowing money from one source to pay off what you currently owe on your credit cards.

While you will still owe what you borrowed to pay off those credit cards, consolidating debt in this way can accomplish a variety of goals. 

Goals for Credit Card Debt Consolidation

Described below are a variety of the things you can accomplish when you consolidate credit card debt. Which of these goals you achieve depends on your debt consolidation plan. 

Pay down the debt faster

If you want to eliminate your debt quickly, debt consolidation might help you in a few ways. 

First, consolidating multiple credit cards into one makes it easier to track what you still owe and budget to pay off that debt faster.

Also, with fewer payments to keep track of, you can reduce the risk of late payment penalties. Those penalties set back your efforts to pay off debt.

Finally, if you’re able to lower your interest rate with credit card debt consolidation, more of each monthly payment will go towards paying down principal, and less towards interest payments. That will reduce your balance more quickly.

Lower your interest rate

Credit card debt is an especially expensive form of debt. Credit card interest rates are generally higher than rates on personal loans, mortgages, car loans, and student loans. 

Lowering the interest rate is a common goal of credit card debt consolidation. 

To accomplish it, make a note of the interest rate you’re paying on each credit card balance. Then look for a way to pay off those balances by borrowing at a lower rate. Some possibilities for doing that will be outlined later in this article.

Reduce overall debt cost

The cost of your debt is the interest you pay. The way to lower the total cost is to reduce your interest payments. 

Either or both of the approaches already described can accomplish this. If you pay down debt faster, you will pay interest for fewer months and reduce the cost of your debt over time. Also, lowering the interest rate you pay on what you owe would reduce the cost.

Make monthly payments more affordable

People who are struggling to meet their minimum payments from month to month may need to reduce those monthly obligations just to keep up. 

Simply consolidating debt may do this if you can reduce your monthly payment to an affordable level.

Lowering your interest rate can also reduce your monthly minimum payments by dropping the interest component of those payments.

Finally, you can shrink monthly payments by stretching repayment over a longer period. That could cost more in the long run because you’d be paying interest over more months or years, but it may be necessary if you can’t meet your current minimum payments. 

Organize credit card payments

Whatever your financial goals, a side benefit of consolidation is making your monthly payments easier to manage. If you have multiple credit cards, it can be hard to track balances, monthly minimum payments, and due dates.

Consolidating all of that into a single payment is easier. That helps you make your payments on time and stay on top of your debt. 

What Is a Debt Consolidation Loan?

A debt consolidation loan can be any loan you use to pay off existing debt. The type of loan depends on what’s available to you given your financial situation. Also, the length of the loan term and the interest rate determine which consolidation goals you can accomplish. 

The sections that follow outline how to use various loans for credit card debt consolidation. 

How to Consolidate Credit Card Debt with a Cash-out Refinance Mortgage

If you have equity in a home, you may be able to refinance for more than your current mortgage balance to get some extra cash to use for other purposes.

You can use this extra cash to pay off your credit card balances. Since mortgage interest rates are generally much lower than credit card interest rates, this should reduce the cost of your debt. This approach could also lower your monthly payments by stretching repayment over a longer time.

Cash-out refinancing generally only makes sense if you can refinance at a rate equal to or less than your current mortgage rate, and if the cost is lower than other options (cash-out refinances come with extra fees which apply to the entire balance, not just the cash out). Unless you have a small mortgage and want to take a large amount of cash out, it’s probably cheaper to do a standard refinance and just add a home equity loan or HELOC to consolidate your debt.

Also, remember that a mortgage uses your home as collateral, so make sure you have a solid repayment plan before you take this step. 

How to Consolidate Credit Card Debt with a Second Mortgage or HELOC

A second mortgage or a home equity line of credit (HELOC) might be a cheaper and better way to consolidate credit card debt.

As with a cash-out refinance mortgage, this approach can lower your interest rate and stretch repayment over a longer period. 

Again though, doing this puts your house on the line, so plan for how you’ll be able to make your payments before taking this step.

How to Consolidate Credit Card Debt With a Personal Loan

If you don’t have home equity to borrow against, you may be able to use a personal loan to consolidate credit card debt.

Personal loan rates are generally lower than credit card interest rates, and people with excellent credit can see rates that are nearly as low as home equity loans. However, the rate you get will depend on your financial situation and credit history. 

Those same factors also affect your ability to get a personal loan in the first place, so this approach is best for people whose debt problems haven’t gotten too far out of hand. 

How to Consolidate Credit Card Debt with a 401k Loan

If you have trouble getting credit, an alternative might be to borrow against your 401k retirement plan balance, if you have one.

This depends on your employer’s rules about borrowing from a 401k plan. There are also risks involved. Borrowing from your plan balance means you’ll be missing out on investment gains until the money is repaid. Also, if you leave your current job you may be required to repay the loan immediately or face tax penalties. 

How to Consolidate Credit Card Debt with a Balance Transfer Card

Balance transfer credit cards may be a good way to consolidate credit card debt if you have a plan to pay off the debt within a year or two.

Balance transfer credit cards typically offer a very low interest rate (even 0%) for a limited period of time. That gives you an opportunity to save on interest charges while you pay off the debt. 

If you take this approach, just be aware of balance transfer fees that will reduce some of your savings. Also, it’s important to pay off most or all of your debt within the low-interest period. Otherwise, you may get stuck with a remaining balance at a higher interest rate than you have now.

Making Credit Card Consolidation Work

Credit card debt consolidation only really works if it’s part of a long-term budget program.

This means planning how you’ll pay off the consolidation debt, as well as for how to rein in spending to stop racking up new debt. 

Unless you have a budget that doesn’t depend on new borrowing, and can stick to that budget, adding a consolidation loan may only increase your total debt in the long run.

Dealing with debt

If you are struggling with debt, you are not alone. According to the NY Federal Reserve total household debt as of Quarter Q1 2024 was $17.69 trillion. Student loan debt was $1.60 trillion and credit card debt was $1.12 trillion.

According to data gathered by from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 10% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.

The amount of debt and debt in collections vary by state. For example, in West Virginia, 37% have any kind of debt in collections and the median debt in collections is $1459. Medical debt is common and 24% have that in collections. The median medical debt in collections is $553.

To maintain an excellent credit score it is vital to make timely payments. However, there are many circumstances that lead to late payments or debt in collections. The good news is that there are a lot of ways to deal with debt including debt consolidation and debt relief solutions.