Credit card debt is an unfortunate reality for many people. Americans held $1.17 trillion in balances at the end of 2024, according to the Federal Reserve Bank of New York. Many people struggling with repayment want relief to help put them on the road to financial stability. While consolidating multiple credit cards into one payment solution offers simplification, it’s important to weigh the pros and cons. Fortunately, several debt consolidation options exist to streamline repayment and help you achieve financial freedom.
What is credit card consolidation?
Consolidating credit card debt is a simple process that allows people to pay off debt by saving money on interest payments. It does this by merging all of your debt and paying it off via a loan or some other resource at a lower rate.
Smart credit card consolidation can save you money and help you eliminate debt, ultimately restoring financial stability and enabling you to achieve other financial goals.
However, not all debt consolidation options are equal. Credit card debt consolidation services, for example, are a popular choice, but they’re not for everyone. Selecting the right one for your needs can mean the difference between success and frustration.
Best ways to consolidate credit card debt
There are various ways to consolidate credit card debt, and there’s no one-size-fits-all approach. Credit score, amount of indebtedness, goals, and more all play a role in choosing the best option for you. These are five reasonable ways to pay off credit card debt and save on interest.
Transfer your balance
Balance transfer cards can be a great tool to manage credit card debt. The idea is simple: you open a 0% APR card and transfer your balances to that card.
You can expect 0% interest for 12 to 21 months with this option, allowing you to focus solely on the principal. There’s one catch. You typically must repay the entire amount before the promotional period is over. Otherwise, the bank may retroactively charge you interest on the entire amount. That aside, a balance transfer card can be one of the best solutions for credit card debt.
“If you have good to excellent credit, however, you might qualify for options like balance transfer credit cards or low-interest personal loans, which can help you pay off debt faster while keeping any damage to your score at a minimum,” says Leslie H. Tayne, Esq., finance and debt expert and founder of Tayne Law Group.
Pros:
- Helps avoid interest
- May earn rewards on new purchases
Cons:
- Often carries a balance transfer fee
- Requires good to excellent credit
Borrow from your 401(k)
Borrowing from your retirement plan isn’t always one of the best alternatives to credit card consolidation. However, if your 401(k) offers loans and you manage it wisely, it can work in your favor.
It’s commonly possible to borrow up to 50% off your balance for up to five years. If you’re struggling with credit card debt and have a good plan, the impact on retirement savings may be worth it.
Unfortunately, IRS regulations dictate that if you lose your job for any reason, you must repay the loan upon leaving.
Pros:
- Lower interest rate than most cards
- No impact on credit score
Cons:
- Hinders retirement savings
- Fees and penalties if you leave your job
Ask a family member to help
Mixing family and money can be tricky, at best. However, if you’re genuinely overwhelmed by credit card debt, this may be a justifiable solution.
It’s best not to assume the family member is simply giving you the money. Rather, it’s essential to establish clear terms of the loan. Make clear how much the person is providing, when payments are due, and if they’re asking for interest. Act as if they’re your banker. Otherwise, you risk souring the relationship.
Pros:
- Doesn’t harm your credit score
- Typically reduces interest
Cons:
- Can harm relationships
- You may harm their finances
Home equity line of credit (HELOC)
Home equity loans are a common solution for credit card debt relief. A loan provides funds as a lump sum, typically at a fixed rate, of your equity. HELOCs provide a line of funds for those to use as they see fit to repay indebtedness, albeit at a variable rate.
Taking equity out of your home doesn’t eliminate payments from your budget, as you must repay the funds. If you have adequate equity in your home, this can be a good alternative to consolidation, but compare lenders to receive the best possible rate.
Pros:
- Lower interest rate than credit cards
- Extended payment terms
Cons:
- It puts your home at risk if you miss payments
- Interest isn’t tax deductible
Peer-to-peer loan
Personal loans can be a good way to reduce credit card debt, but you may not be able to meet eligibility requirements. If that’s your case, a peer-to-peer loan can be a feasible solution.
Some platforms are more lax in requirements, so they can be a solution for those with bad credit. Furthermore, your credit score can impact the rate you receive on the loan.
Pros:
- May have lenient eligibility requirements vs. personal loans
- Possibly lower interest than most credit cards
Cons:
- Can carry fees
- Higher interest rates than other consolidation options
The impact of credit card consolidation on your credit
Determining if credit card consolidation is a good idea comes down to various factors, with credit score being prominent. Unfortunately, your credit score may already be suffering. Tayne concurs, adding, “If you’re considering consolidation because you’re struggling with payments and have fallen behind, your credit has already taken a hit.”
In this case, an option such as a balance transfer is likely less of a possibility. If that’s not your situation, applying for a balance transfer card or taking out a loan can hurt your score, and cause higher utilization if you opt for a balance transfer card.
Ultimately, credit scores can improve, but what’s typically most important is eliminating debt. “Choosing a solution that allows you to resolve your debt ASAP will allow you to start building your credit sooner rather than later,” says Tayne.
What to watch out for with consolidating credit card debt
There’s an ample supply of credit counselors to choose from. Sadly, not all services act in the best interests of users, and it can result in worsening a situation.
Doing your research is vital if you select this route. There’s little need to pay exorbitant fees and spend a lot of money to consolidate credit card debt. “You should be cautious when working with a debt settlement company, as not all of them operate with your best interests in mind. First, watch out for upfront fees – legitimate companies only charge after settling a debt, not before. Blanket guarantees are also a red flag since no company can promise specific results or that creditors will agree to a settlement. In addition, in many states, debt settlement companies have to be licensed,” Tayne says.
Reputable companies can help users get to the root cause of indebtedness, help you create a budget, and assist you in achieving financial goals. If something feels off about the service, it’s often best to look elsewhere.
The bottom line on getting rid of credit card debt
Credit card debt consolidation can save loads of money on interest. Selecting an option that doesn’t fit your specific situation may cause more heartache than it’s worth. Before you make a decision, make sure you’re committed to making changes and staying debt-free. If you pair a wise choice with that commitment, success shouldn’t be far off.
