Ways to consolidate credit card debt

Jennifer Brozic is a personal finance writer and has written for Citi. Editor's note: Credit Karma receives compensation from third-party vendors, but that doesn't affect our editors' opinions. Our marketing partners do not review, approve or endorse our editorial content. They have been prepared to the best of our knowledge and belief at the time of publication.

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Consolidating credit card debt can help simplify and lower your monthly payments while you work to become debt-free.

When consolidating credit card debt, you combine multiple credit card balances into a single monthly payment that ideally has a lower interest rate than what you're currently paying.

But consolidating your debt takes time, and many methods require an application process to see if you'll be approved first, which usually results in a hard credit inquiry that can cause your credit score to drop a few points.

To help you decide if credit card consolidation is right for you, here are some methods to consider.

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  • Work with a nonprofit credit counseling organization
  • Apply for a personal loan
  • Use a balance transfer credit card
  • Ask a friend or family member for help
  • Cash-out auto refinance
  • Home equity loan
  • Retirement account loan
  • Navigating credit card debt during COVID-19

Work with a nonprofit credit counseling organization

Credit counseling organizations can review your entire financial situation and work with you to create a plan to tackle your financial challenges. They provide advice on credit issues, budgeting, money management and debt management.

When working with a loan officer, it's important to research the organization before you get started. Check with your state's attorney general's office and consumer protection agency to make sure the organization is reputable.

Pros: a credit counseling organization can work with your creditors to set up a debt management plan on your behalf that requires you to make a single payment to the credit counseling organization each month. The organization then uses the money you provide to pay your creditors. Your credit counselor can also work with your creditors to negotiate lower interest rates or waive certain fees.

Cons: Some loan servicers may charge a fee for some of their services, and you may have to agree not to apply for new credit or use your existing credit if you participate in a debt management plan.

Apply for a personal loan

A personal loan can be used to consolidate debt, and the funds from a debt consolidation loan can be used to pay off your credit card balances. So instead of making multiple credit card payments each month, make just one payment on the personal loan.

Pros: if you have a good credit score, you can qualify for a lower interest rate on a personal loan than the rates your credit card issuers charge. Personal loans offer flexible repayment terms so you can choose the one that fits your budget. Also, some lenders send payments directly to your creditors, so you won't be tempted to use the loan funds for anything else. And many lenders offer the option to apply for prequalification, so you can shop around to see what your potential options are without hurting your credit score.

Cons: You must meet the lender's requirements to qualify for a personal loan. If you have had financial difficulties in the past, you may not qualify, or you may only qualify for an interest rate comparable to your current credit card interest rate. In addition, some lenders charge a processing fee that can add hundreds of dollars to the cost of your loan, which can eat up your loan amount before you even receive it.

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Use a balance transfer credit card

A balance transfer allows you to transfer funds from one or more credit card accounts to another card. Balance transfer credit cards often offer an introductory 0% APR on balances you transfer within a certain time period.

Pros: If you pay off the transferred balance before the end of the phase-in period, you can avoid paying interest charges on the transferred balance altogether.

Cons: The promotional period is limited. If you don't repay the transferred amount in full and on time before the introductory period ends, the remaining balance will earn interest at the card's regular rate.

In addition, some cards charge a transfer fee that increases the debt you have to repay. In addition, the amount you transfer – including all fees – cannot be higher than your credit limit, which may not be high enough to pay off all your debts.

Keep in mind that you may not be eligible to transfer balances between cards from the same lender. And if you choose a balance transfer, it's especially important to pay on time because late payments can negate the introductory APR offer.

Ask a friend or family member for help

Depending on how much money you owe and your overall financial situation, it may make sense to ask a friend or family member to lend you the money.

But if you choose this method, it's important that the loan terms and repayment schedule are clearly outlined, just as they would be with a loan from a financial institution.

Pros: when you borrow money from someone you know, you don't have to meet any minimum requirements to qualify for the loan, and you may be able to get a lower interest rate than you would at a bank or credit union.

Cons: Borrowing money from someone you know is tricky because it can strain your relationship. If you can't repay the loan on time, you put that person's finances at risk.

Caution on the following options

The following are other methods of credit card consolidation that are available, but we do not recommend them because they are riskier than the options we discussed above.

Cash-out car refinancing

Some lenders offer cash-out refinance auto loans, which allow you to use the equity in your car to give you a loan for other expenses, such as consolidating credit card debt. But if you're unable to make your payments, you risk losing your vehicle.

Home equity loans

Home equity loans allow you to borrow against the equity in your home and use the money to pay for just about anything. This may seem like a good option because these loans often have lower rates than credit cards and personal loans. But if you fall behind on payments, the lender usually has the right to foreclose, and you could lose your home.

Retirement account loan

If you participate in an employer-sponsored retirement account such as a 401(k) or 403(b), it may be tempting to use some of those funds to pay down your debt. Retirement account loans don't require a credit check as long as your plan offers a loan option – some don't – and interest rates are typically lower than what you would pay at a bank or other lender. But if you are unable to make your payments, the amount you withdrew could be taxed, and you may have to pay an additional penalty. Since the borrowed funds do not earn interest, you miss the opportunity to increase your retirement income.

Credit card debt during COVID-19

If the financial impact of the coronavirus pandemic has you looking for ways to consolidate your credit card debt, you're not alone. Many people have more debt right now or are facing debt problems they never had before.

If that describes your situation, you may have more than one option.

We've compiled some resources to help you find relief measures announced by the government, credit card issuers and more. If you can take advantage of these relief measures, they can help ease some of your financial burden and make your debt more manageable. Check out our summaries of these resources below.

Government Action

  • CARES Act relief: what you need to know
  • Debt relief measures at the federal, state and local levels

Relief measures from lenders and credit card issuers

  • Car loan and debt relief: What some auto lenders are doing to help
  • Coronavirus: mortgage debt relief programs for homeowners
  • Coronavirus credit card payment and debt relief: How issuers are responding to COVID-19
  • Coronavirus Student Loan Payment and Debt Relief: What lenders do to help

General advice on how to reduce debt

If you're looking for general tips on how to budget or get a handle on your credit card debt, we can help you with that, too.

  • How to get out of credit card debt
  • Credit Karma guide to budgeting
  • How to get out of debt in five steps

What's next?

Consolidating your credit card debt into a single payment may seem like the solution to your financial problems, especially if you can get a lower interest rate.

Before you consolidate your credit cards, however, you should establish a budget that will help you minimize your expenses while you pay off your debt. Once you have a plan, you can choose the credit card consolidation method that's right for you. And try to avoid choosing a debt consolidation method that could put your home, car or retirement in jeopardy.

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About the Author: Jennifer Brozic is a freelance financial services writer with a bachelor's degree in journalism from the University of Maryland and a master's degree in communications management from Tow..

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