January 30, 2024

Credit Card Debt Consolidation: 7 Ways to Deal With Debt

Credit cards are an essential financial tool in modern personal finance. They offer convenience, rewards, and the ability to make purchases even when cash is scarce.

But this convenience comes at a hefty cost: the responsibility of managing credit card debt. Over time, multiple credit cards with varying interest rates can become a burden, creating a cycle of debt and leading many to seek solutions like credit card debt consolidation. Understanding how to consolidate credit card debt through a debt consolidation loan is a major step toward better financial health and personal peace of mind.

What is credit card debt consolidation?

Before you learn how to combine credit card debt, let’s talk about the concept of consolidation.

The main goal of consolidating credit card debt is to simplify payments and reduce the interest you pay over time. Consolidating your debt can secure a lower overall interest rate, save money, and help you move toward becoming debt-free.

How does consolidating credit cards work?

The best way to consolidate credit card debt starts with looking at your financial situation. This includes listing all credit card debts, interest rates, monthly payments, and other relevant details.

Once you’ve done this, it’s time to explore your consolidation options, like taking out a consolidation loan from a lender like LightStream or opting for a balance transfer card.

Several options exist (more on those below), but one thing’s for sure: You should avoid accumulating more credit card debt during the consolidation process. This means taking a pause on making new purchases on the old credit cards and focusing on paying down the consolidated debt.

Seven ways to consolidate credit card debt

Credit card debt can be consolidated through various methods, each with advantages and disadvantages. Here are some of the most common strategies:

Balance transfers

This involves transferring the balances of multiple credit cards onto a single new credit card, preferably one with a lower interest rate or an introductory 0% APR offer. This allows you to focus on paying off one balance instead of juggling multiple payments.

But be aware of balance transfer fees and make sure the transferred amount is paid off before the promotional period ends.

  • Pros: Balance transfers offer simplified payments and potentially lower interest rates.

  • Cons: Balance transfer fees and interest rates may spike after promotional periods.

Credit card consolidation loan

Taking out a credit card consolidation loan, is another common way to pay off multiple credit card balances. Use the loan to pay off the balances, and then make monthly payments on the loan, typically at a lower, fixed annual percentage rate (APR) with a set repayment term. Some loans come with an origination fee.

Lenders like LightStream and SoFi offer competitive rates for these types of loans.

  • Pros: These loans offer a fixed interest rate, set repayment term, and potentially lower monthly payments.

  • Cons: They may require you to be creditworthy for favorable terms and lower loan origination fees.

Home equity loan or line of credit

You can use your home’s equity as collateral to pay off credit card debt. This option, also known as a HELOC, typically offers lower interest rates but comes with the risk of losing your home if you default.

  • Pros: You’ll enjoy lower interest rates and potential tax benefits.

  • Cons: Again, this loan comes at the risk of losing your home, and you will incur closing costs.

Retirement plan loans

This method involves borrowing against your retirement plan. It provides quick access to funds, but it can jeopardize your future financial security.

  • Pros: There’s no credit check, and the interest rates are competitive.

  • Cons: The potential penalties and taxes may jeopardize your retirement savings.

Personal loan

You can borrow a fixed amount from a bank or credit union to pay off credit card balances.

  • Pros: Personal loans have a fixed interest rate and a set repayment term.

  • Cons: They may require good credit, and there are potential loan origination fees.

Help from family and friends

Borrowing money from someone you know is an inexpensive way to pay off debt. This method avoids banks and credit checks but can strain personal relationships.

  • Pros: With a loan from a loved one, you have more flexible repayment terms and low or no interest.

  • Cons: Owing money can strain relationships. This method also lacks formal loan protections.

Debt management plans

You can also work with a credit counseling agency to consolidate debts into a single monthly payment. This method may have lower interest rates and waive fees.

  • Pros: You’ll pay lower interest rates, and the agency may waive fees.

  • Cons: Your plan may have setup and monthly charges, making it take longer to pay off debt.

How credit card debt consolidation affects your credit score

Consolidating credit card debt can have both positive and negative impacts on your credit score. That’s why it’s essential to weigh the potential credit score impacts against the benefits of consolidation, like lower interest rates and simplified payments.

Positive impacts

If done correctly, consolidation can improve your credit utilization ratio, leading to a higher credit score. On-time payments on the new consolidated loan or credit card can also boost your payment history.

Negative Impacts

Applying for new credit (like a balance transfer card or consolidation loan) may result in a hard inquiry on your credit report, which can temporarily lower your score. Closing old credit card accounts after transferring balances can reduce your overall credit limit, which can also affect your credit utilization ratio.

Taking control with consolidation and beyond

Remember, consolidation can be beneficial, but it’s only one piece of the larger financial puzzle. You can move further your toward financial freedom with continuous financial education, budgeting, and financial tools and resources.

Ultimately, the goal is not just to erase debt but to build a stable financial future where debt doesn’t dictate your choices.

How EarnIn can help you access your money

Financial tools and resources play a pivotal role in the journey to financial independence. Enter, EarnIn.

The EarnIn app offers many such tools to give you a new set of options with your money. Our Cash Out tool lets you access your pay as you work — up to $100 a day and up to $750 every pay period with no credit checks, no interest, and no mandatory fees — so you have what you need to keep moving forward, whatever life sends your way.

Download the EarnIn app today and experience money at the speed of you. Try our credit card payoff calculator to get a personalized plan to become debt-free faster and smarter.

Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.

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