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How to consolidate your credit card debt

If you find it difficult to manage multiple credit card payments or if you simply want to move from a credit lifestyle to a savings lifestyle, it may be time to consolidate your credit card balances and begin chipping away at your credit card debt. Debt consolidation is when you bring your outstanding balances to a single bill and it can be a useful way to manage your debt.

Your first step—before you commit to a credit card consolidation solution—is to understand your current credit situation. Once you know exactly where your credit card debt stands, you can find and then select a solution that meets your specific needs. As you move towards a zero balance, you can take steps to ensure that you maintain a healthy credit habit to help keep balances low and credit scores high as your credit history matures. In this article, we'll cover the following topics:

  • Should I consolidate my credit card debt?
  • Know your current credit card debt status
  • Ways to consolidate your credit card debt, including:
    • Debt counseling service
    • DIY debt consolidation
    • Credit card balance transfer
    • Debt consolidation loans
  • How to build and maintain healthy credit habits

Should I consolidate my credit card debt?

Credit card consolidation may help the interest rate and may help put you on the right track to paying off your debt, and that's a good thing. Debt consolidation can simplify your financial life. While it can improve your financial health, it's important to understand what each option entails. They all come with pros and cons.

Know your current credit debt status

The first step is to take stock of just what you owe and what your monthly take home salary is. Start tracking what you owe and what you earn, to get a handle on what's coming in, going out, and how much is left over on a monthly basis.

Know your credit cards: What you owe, minimum payments, and APR

Whether on paper or with a spreadsheet, collect your most recent credit card statements and document:

  • The total amount owed on each card,
  • The current minimum monthly payments due on each card, and
  • The annual percentage rate (APR) of each card.

Know your budget: Track your income and bills

Next, collect recent pay stubs to understand your typical monthly income (leaving out any bonuses or tips that you can't depend on each month).

Now, on the debt side, add to your list of credit card balances a collection of your recent monthly and annual bills. That'll likely include things like:

  • Rent, mortgage and other housing costs
  • Utilities, like water, gas, heating and electricity, broken down by average monthly balances
  • Loans and insurance: Car loan and insurance, student debt payments and other personal loan or insurance costs
  • Subscription service payments (such as cable TV and cell phone bills)
  • Grocery and commuting bills
  • Education and child-care costs
  • And anything else that's a regular monthly payment, like gym memberships and public transport costs

You can also load this information into an online budgeting tool, such as Chase's Budget, to keep on hand for future reference. There are also plenty of budget apps online that are free and easy to use.

Once you have all of this, you'll have a clearer understanding of your total expenses and income, and how much credit card debt adds to monthly costs.

Know your balance: Can you meet your minimum payments?

Using your minimum credit card payments, add up all your monthly payments and debt (not just credit cards). Is your monthly bill total larger than your monthly income or is your income greater than your bills? Use your knowledge of your overall balance to select a credit card debt consolidation solution that fits your situation.

Ways to consolidate your credit card debt

Emboldened by your knowledge of your finances, you can begin to select the debt consolidation strategy that works best for you.

Credit card balance transfer

Transferring your balances can be a way to help reduce your interest rates by doing a balance transfer from higher rate credit cards to a lower rate credit card.

If you know your current credit cards' APRs, it should be simple to identify a new credit card that offers both (1) a lower APR and (2) an ability to transfer existing balances. If you can earn approval for a new credit card that meets both conditions, you will want to ask the card issuer about any fees associated with a balance transfer. For example, sometimes fees are based on the dollar amount of the balances that you transfer. Understand what your particular balance transfer strategy will cost you before you commit to consolidating your debt through a balance transfer.

0% introductory APR credit cards could be a cost-effective way to transfer an existing credit card balance, as they will not charge interest until the introductory period is over. When transferring balances to this type of 0% introductory APR credit card, your goal should be to pay as much of the balance as possible before the introductory period ends and to not make any new charges on this new card.

Finally, avoid thinking of continually transferring balances to escape from paying your credit card debt. While your credit score may currently allow you to open new cards, a perpetual habit of opening new cards to transfer your balance could drive your credit score down. Think of balance transfers as a one-time window when you will commit every bit of income you can to reduce your credit card balances before the introductory period expires and interest charges kick in.

Pros of a credit card balance transfer

  • Credit card balance transfers can move your current credit card debt from a high APR to a lower (or 0%) APR for an introductory period of time, help reduce the amount of interest you will owe each month. Keep in mind that once the introductory period is over, the APR will increase. Be sure to read the terms of your balance transfer carefully so you know when your APR will change and by how much.
  • Once approved, the transfer of funds can take a few weeks so make sure to make payments on your card until the transfer is made.
  • Transferring the balances on multiple cards to a single card may feel easier to manage.

Cons of a credit card balance transfer

  • When 0% introductory APRs expire, your entire balance can be charged interest, at the higher rate, which was provided to you when you opened the credit card.
  • Balance transfers often require a balance transfer fee, which could be 3-5% of the total amount you are looking to transfer.
  • Opening multiple credit cards in order to make balance transfers may reduce your credit score, which may make it more difficult to earn approval for a balance transfer credit card the next time around.
  • Most credit cards have a strict limit on the maximum balance you can transfer. Make sure that limit meets your debt consolidation needs before committing to a balance transfer strategy.
  • You may be tempted to use your new available credit, leading to additional credit card debt.

Debt counseling services

You may also find many options through debt counseling services, something many people turn to when they need help managing their credit card debt. Debt counselors can help you choose the option that makes the most sense for your lifestyle and needs.

Pros of debt counseling services

  • A debt counseling service that is accredited by the National Foundation for Credit Counseling (NFCC) may be able to help you get fair and affordable help.
  • Debt counselors will aim to consolidate all of your credit card debt into a single payment, making it easier to manage and include in a budget.

Cons of debt counseling services

  • Until you repay your debts through the approved debt counseling consolidation plan, you usually will not be able to open or apply for any new lines of credit or loans.
  • Some debt counseling services advise closing out credit cards when they have been fully paid off. But keeping cards open and active (even when you are not using them to make charges) may help to improve your credit score.
  • Some debt counseling services require certain levels of income, expenses, and debt to qualify for assistance.
  • Service fees will likely apply over the course of your credit card debt repayment program, so be sure to ask what sorts of fees, penalties, and costs will apply to your account before you commit to anything.

Debt consolidation loan

Like most lines of credit, debt consolidation loans use your credit score and income information to establish the amount of the loan, the interest rate, and other terms of the loan.

Debt consolidation loans will typically allow higher levels of borrowing than credit card balance transfer options and lower interest rates than most credit cards.

You will want to be certain that the loan's monthly payments are lower than your current total minimum monthly credit card payments, as well as a lower interest rate.

Pros of a debt consolidation loan

  • Consolidates multiple credit card debts into a single loan payment, making it easier to manage and build a budget around.
  • May allow for higher borrowing limits, suited to consolidate large amounts of credit card debt.
  • Typically will offer lower interest rates than similar credit card options.
  • Some debt consolidation loans provide options for co-signers, which may allow the better credit of the co-signer to earn lower rates and better terms for the loan.
  • Prompt repayment of a debt consolidation loan may improve your credit score by paying off your existing credit cards. You may also find an improvement in your credit utilization ratio.

Cons of a debt consolidation loan

  • Interest rates and payment terms may depend on your credit score, among other factors.
  • Once you transfer your credit card balance to the debt consolidation loan, you may be tempted to use your credit card, which could further your credit card debt.

Credit card payoff strategy: DIY debt consolidation

For those that wish to consolidate debt on their own, there are a number of methods to choose from to reduce balances to zero.

Snowball method vs. avalanche method

There are two suggested ways to attack credit card debt on your own: the snowball method and the avalanche method. If you have tracked your credit card balances, minimum payments, and APR, either method is simple to understand:

  • The snowball method aims to pay off your smallest loans first and as quickly as possible. After that, you tackle the next-smallest debt owed by paying it off, and so on. You get the smallest debt off the books before moving to the larger ones.
  • The avalanche method suggests that you first pay off the debt with the highest APR. Once the highest-interest debt is paid off, you tackle the next-highest interest rate, and so on.

With either method, when you have fully paid off either the card with the smallest balance or the card with the highest APR, you reserve that same monthly payment and direct it at the next credit card in line.

Pros of DIY debt consolidation

  • Either the avalanche or snowball method allows you to use your budgeted funds to attack your credit card debt.
  • DIY debt consolidation does not require additional commitments to new lines of credit or loans.
  • Managing debt repayment on your own helps to build a budgeted strategy for habitual savings that can continue after your credit card debt has been paid off.
  • Paying your credit card debt on time, keeping your paid-off accounts open, and reducing your balances versus your credit limits will help contribute to higher credit scores.

Cons of DIY debt consolidation

  • It can be difficult to keep track of regular payments if you have variable monthly income.
  • DIY debt consolidation is great for those who feel they can afford a campaign to pay off their debt, while still accruing interest rate charges on their existing balances. But it may be more difficult if you are struggling to meet your minimum payments.
  • DIY debt consolidation requires unwavering determination to pay off credit card balances, and an ability to consistently track and manage budgets and finances.
  • You will have additional available credit, which could lead to overspending.

Home equity or line of credit

A home equity loan allows you to turn a portion of the equity in your home into cash. Because the average interest rate on a home equity loan is typically lower than the interest rate on a credit card, it may be an effective way to consolidate debt. This is because homeowners may use that money from the home equity loan or HELOC to pay off the high interest credit card debt, then pay off the home equity loan at a lower rate.

This option comes with risk though. You may increase your debt load, and if you fall behind on payments, your home may be foreclosed.

401(k) loan

Rules on 401(k) loans can vary, but most employer plans allow you to borrow up to half of your vested account balance, or $50,000, whichever is less. The loan must be paid back within 5 years.

These loans usually have low, often single-digit interest rates, making them a more affordable loan option over credit cards. Interest typically equals the prime rate plus one percentage point, but can be more.

Keep in mind that this kind of loan requires a disciplined financial plan so that you don't completely derail your retirement savings. If you fail to repay on time, you may face a 10% penalty if you're under the age of 59.5. And if you leave your job, you must repay the loan before your next tax filing date.

Build and maintain healthy credit habits

You've finally reduced your credit card debt by taking one of the options above. Here's how you can help keep it that way:

Automate your payments and pay your full balance each month

The largest factor in your credit score is your history of payments: keep them on time and you could see your credit score slowly build. By automating your payments, it may become simpler to stay on top of your credit card debt.

Once you hit your zero balance—whether through a debt consolidation strategy or just careful debt management—convert your mentality of credit cards. Think of credit card debt as something you must pay off in full at the end of each billing cycle. Credit cards are no longer used to buy things you don't yet have money for.

Keep your credit utilization ratio down

Just because you have a credit limit doesn't mean you should hit it.

When the amount you owe in credit is well below the limits of credit that are extended to you, you drive down your credit utilization ratio. An unfavorable credit utilization ratio could cause your credit score to go down.

Make a monthly credit review date

Planning for the future isn't exciting, but living in the future with your wealth will be.

Set aside one day a month to pull out your account statements, credit card statements, and credit report and take stock of your accounts. By reviewing your credit report, you make sure that if there are errors, you can address them quickly. By looking at your accounts, you can detect and document trends that can help you build an updated budget and plan for the future.

Shop for cards that your better credit deserves

Find a credit card with a lower APR or a rewards program that matches your hobbies and cut up (but don't close!) your paid-off, higher-APR cards. The true sign of great credit is when you spend less than what you earn.

Can I still use my credit card after debt consolidation?

Yes, you can still use your credit cards after debt consolidation. It's not required that you close them. If you plan to stop using them for a while though, be sure to monitor the accounts to ensure you're not seeing any unauthorized activity.

Will debt consolidation affect my credit?

You may see a dip in your credit score right after debt consolidation due to any loan applications that you submitted. Over time, making steady payments on time may improve your score though. It's also fine to leave your credit card accounts open with a zero balance. Either way, the length of credit history is a factor in determining credit score, so it may be smart to keep some of them open.

In conclusion

Debt consolidation can be a helpful way to reduce interest rates and get your financial life back on track. If your debt is feeling overwhelming, you may find that you need help from debt counseling services. Other options include consolidation loans, balance transfers, home equity loans and even 401(k) loans.

Regardless of the options you choose, the most successful way to pay off debt is to lower your spending and remain disciplined with your monthly payments.