Credit card debt is easy to accumulate, but not as easy to pay off. According to Experian, the average American carries credit card debt of nearly $4,300 and our total credit card debt as a nation recently surpassed $4 trillion. 

If you’re sick of carrying around those extra payments each month while watching your balance rise from accumulating interest, you may want to consider consolidating your credit card debt. With several options of how to do this, you can weigh the pros and cons to see which best suits your level of debt and other personal details. 

#1: Personal Loans for Debt Consolidation

Personal loans used for credit card debt consolidation purposes are becoming increasingly popular today and there are a few different reasons why. Oftentimes, personal loans come with a much lower interest rate than credit cards. You can likely save money on interest if you find a loan with a better APR than your credit cards.  

When you take out a debt consolidation loan, you use the funds to pay off your credit card (or cards), then start making payments on the loan itself. Some lenders disburse the loan funds to you so you can pay off your credit cards, while others directly pay the other balances on your behalf. 

Many borrowers find it easier and more convenient to keep track of one loan payment rather than multiple credit card payments throughout the month. Another advantage is that you’ll enjoy a fixed rate over a predetermined term length. Unlike credit cards, your rate doesn’t change and your principal and interest payments are spread equally over each month of your term. You get a predictable bill each month, making it easy to plan and get out of debt in a set timeframe.

What to Look Out For

There is a cost involved with most personal loans used to consolidate credit card debt, even if you do find a lower APR. Most lenders charge an origination fee, which can cost anywhere between 1% and 8% of your loan amount. You don’t have to pay it with your own cash; instead, lenders usually take it out of your loan amount before disbursing the funds. 

It’s important to budget this amount into your debt consolidation plan, since you may end up with less money than you expected to settle your credit card accounts.

#2: Open a Balance Transfer Credit Card

While most credit cards allow you to transfer a balance from another card, this works well for consolidating multiple cards when you find a good promotional offer. This type of promotion usually includes a low or no interest rate for a set period of time, anywhere between six months to a year and a half on the longer end. 

The best choice is obviously a 0% APR transfer because all of your payments go directly towards your debt and won’t accrue anything new until the promotional period ends. It’s a great choice if you think you can knock out most or all of your credit card debt before the promotional period ends. 

What to Look Out For

Although a low balance transfer promotion sounds idea, there are a few caveats to be aware of. The first is the balance transfer fee. Most credit card companies charge you a percentage of the total balances that are transferred to your new card, which can be as high as 5%. The fee is added to your balance.

It’s also very important to stay on top of your payments during a balance transfer promotional period. If you make even one late payment, you’ll likely lose your introductory rate and go back to the original rate of that particular card. Depending on the terms of your original credit cards, you could end up paying even more than before the transfer. You could also be charged a higher penalty fee if you make multiple late payments on the account.

#3: Use a Loan from Your Retirement Account 

It’s possible to use a 401(k) loan to consolidate your credit card debt, but this should generally be used as a last resort since it could jeopardize your future financial security. Here’s how it works so you can weigh the pros and cons.

If you have a 401(k) retirement account with your employer, you can borrow up to half your funds, with a maximum of $50,000 repaid over as long as five years. Interest rates are low, and you’ll actually pay them back into your account since you’re essentially borrowing from yourself. There is no prepayment penalty, so it’s cost-effective if you plan on paying off the balance early.

What to Look Out For

Taking money out of your 401(k) impacts the long-term growth of your retirement savings, especially during a strong market. Even though you’re repaying yourself a low-interest rate, you still miss out on compound interest for the entire length of your loan.

Another downside is that if you leave your employer, you automatically have to repay the entire outstanding loan balance. It doesn’t matter what the circumstances are, whether you quit, get fired, or are laid off. Even if it’s out of your control, you can be placed in an extremely precarious financial situation with the potential to default on your loan.

#4: Tap Into Your Home Equity

Another way to consolidate your credit card debt is to utilize your home equity either through a HELOC or a cash-out refinance. A HELOC is a home equity line of credit. Rather than receiving a lump sum of cash, you instead get a credit line you can draw on up to a set limit. You’re only charged interest on what you use, so you can opt to repay your highest-APR credit cards and start paying them down immediately. Your home equity is used as collateral for the HELOC, which typically comes with a much lower interest rate.

 A cash-out refinance is similar in that you’re using your home equity, but you’re actually paying off your original mortgage with a new one. You can take out a larger amount and get cash for the difference, assuming you have enough equity in your home. 

For example, say your current mortgage is $250,000 but your home is now valued at $300,000. You could refinance to a $280,000 mortgage that pays off the first one, then gives you $30,000 in cash to pay off your credit cards. While mortgage rates are much lower than credit card rates, remember that you’ll end up paying that amount for the entire length of your new mortgage (assuming you don’t sell before then).

What to Look Out For

The major red flag to consider with either a HELOC or a cash-out refinance is that you’re taking unsecured credit card debt and turning it into secured debt that uses your home as collateral. If some major unexpected financial disaster occurs in your life and you can’t afford those extra HELOC payments or higher refinance payments, you could end up losing your home.

#5: Enroll in a Debt Management Plan

If you’re engulfed in credit card debt and don’t qualify for less risky resources like a debt consolidation loan, you could consider a debt management plan. Your credit card debt is all rolled into a single consolidated account through your debt management company, and you could start paying lower rates. 

The plan spreads out your payments over three to five years. During this time, however, you’re not allowed to charge any new debt. In fact, your accounts may even be suspended or closed so you won’t have your credit cards as financial back-up.

What to Look Out For

One of the biggest consequences of enrolling in a debt management plan is that your credit card company could report your account as not paid as agreed. This could hurt your credit score for future opportunities, so think about how desperate you are for debt consolidation help as you weigh your options. Also, first consult with a nonprofit credit counseling agency before enrolling in any debt management plan. They’ll help you consider the pros and cons to make the best choice.

The Bottom Line

There are multiple ways you can choose from to consolidate your credit card debt. The options available to you range on a number of factors, like your credit score and level of debt. To start the decision-making process, think about how overwhelmed you are by your credit card debt. 

If you want to get rid of it so you can save money and live debt-free, try one of the less drastic options. But if you’re having trouble keeping up with your payments and don’t know how you’ll pay off your high balances, you may qualify for one of the more intensive consolidation plans. Just remember that the sooner you make a decision and consolidate your credit card debt, the sooner you’ll meet your pay off goals and move on with your life. 


Lauren's work has been seen in a variety of news outlets, including the Chicago Tribune, Crediful, Kiplinger, and CBS News. Before her writing career, Lauren worked in community outreach for the Federal Reserve Bank of Richmond as well as in non-profit fundraising. She lives in the Blue Ridge Mountains with her husband and three kids.

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