And with an average interest rate of 19.24%, it becomes incredibly hard to get ahead and stay ahead of credit card debt.
While responsibly using a credit card can be a great way to build credit, irresponsible use can dig you into a hole that’s hard to dig out of.
If you feel like you’re drowning in debt, keep reading for 9 ways to consolidate credit card debt, and what to be aware of when doing so.
Important Considerations to Consolidate Credit Card Debt
Before we jump into the strategies for credit consolidation, there are a few important things to consider. First of all, credit card consolidation does not reduce your debt.
Consolidation combines your payments so that you’re only making one payment. Otherwise, you’ll have to pay off multiple cards that each have high-interest rates.
Before you jump at the chance to consolidate, get your finances in order. Gather all your statements and figure out exactly how much you owe, and how much you can realistically afford to pay each month.
Those two figures will tell you long how it will take to pay off your debts. Then, consider these options to find out what’s best for you before moving forward.
1. Balance Transfer Credit Cards
Some credit card companies offer balance transfer credit cards. These types of cards allow you to transfer over the balance of your other credit cards, sometimes offering a limited time interest rate of zero percent.
This can be a good idea and can work well, but only if you plan to pay off the full amount of the debt before the introductory interest rate expires. Otherwise, the interest rate could be as high as the card you transferred your balance from in the first place.
For example, if you have two separate credit cards, each with a balance of $3000, and each with their own separate interest rate of 19%, you’re actually paying close to 40% in interest on your combined debt of $6000.
If you are approved for a balance transfer card with a balance of $6000 or more, you can transfer the outstanding debt from both of the other cards and get the benefits of a 0% interest rate.
If it sounds too good to be true, it can be. The key words here are ‘limited time’. The 0% interest rate does not last forever. It varies, but 18 months is the average. It’s also not completely free.
Most balance transfer cards charge a transfer fee of between 2% and 5%. You might have to pay a bit extra up front, but it can save you money down the line if you’re diligent about paying it off.
If you think you can pay off your debt in full in a year and a half, go for it. If not, you might want to consider another option. Use a consolidation calculator to see how much you can save over time, and how long it will take you to square up.
2. Take Out a Personal Loan
Banks and credit unions will often offer a personal loan with a lower interest rate than your credit card. In most cases, they will give you more time to pay it off.
Win, win, right? While this can be a good way to consolidate your debt, not all banks and credit unions will approve you for a loan, especially a low-interest loan, if you have bad credit.
There’s a good chance that having bad credit is what got you here in the first place, so it’s kind of a vicious cycle. If you’ve had good credit all your life and this is your first time racking up a bit of credit card debt, they might be more inclined to approve you for a loan.
If it looks like a habit that you don’t pay your bills on time, they might not approve you. This method is worth a try, but keep in mind that every time someone checks your credit, your score goes down.
3. Borrow from Your Future Self
If you’ve been saving for retirement and putting money away into a 401(k) or IRA, it’s possible to borrow or withdraw money from that pot of cash to pay off your credit card debt.
One benefit of doing this is that there is no credit check involved when borrowing from a retirement account. It is your money, after all. However, most retirement accounts charge an early withdrawal penalty fee if you’re under the age of 59.
Another thing to consider is that most accounts will only authorize you to withdraw up to 50% of the total balance unless you’re buying a house.
Also, you’re taking money from your future. It might seem like a good idea to use the money now to get yourself out of debt, but if you can pay down your credit cards using other methods, we’d recommend doing that instead.
4. Credit Counseling Organizations
There are many companies out there claiming to be credit counselors. While there are a lot of legitimate, nonprofit companies who are in business to help you out, there are also a lot of scams.
If you decide to go this route, do your research. Make sure the company is accredited by the National Foundation for Credit Counseling (NFCC) and read consumer reviews.
A good credit counseling organization will help you form a plan on how to tackle your debt and create a debt management program.
You’ll work with them to decide on a consolidated monthly payment which you will pay to the credit counselor, who will then, in turn, pay your creditors.
They will often have the benefit of being able to negotiate lower interest rates and lower monthly payments for you. This method makes it easier for you to pay off your debt faster.
However, even though most credit counselors are nonprofit companies, the service they offer is not free. There will likely be set up fees and monthly service fees, so take that into consideration when making your decision.
Also, some credit counseling companies require that you close down your account after paying off your debt.
It’s probably a relief to do that anyway once you finally get your balance down to $0, but keep in mind that closing an account can harm your credit score.
5. Borrow Against Your Assets
If you own a house or a car, you may be able to borrow against your assets to get a line of credit to use towards paying off your credit card debt.
This works in a similar way to getting a personal loan from a bank. The benefit of doing this is that the interest rate on mortgage and vehicle loans can be much lower than credit card interest rates.
You can also claim a portion of mortgage interest rates as tax write-offs. However, a poor credit score could keep you from qualifying for a good enough interest rate to make it worth it.
If you do get approved, keep in mind that if you borrow against your mortgage, you’re putting your house on the line. if you are unable to make the loan payments at a later date, you could lose your home.
6. Borrow From Family or Friends
While this option has some serious benefits, including no interest rates and no credit checks, you should tread carefully if you decide to go down this route.
First of all, asking your family and friends for money can be awkward. It can also jeopardize your personal relationships if you are unable to pay it back.
If you are sure you can pay the money back within the promised timeframe, and you know you’re not putting anyone out by asking, then this can be a viable way to get yourself out of debt.
Borrowing money from your family will, of course, be a different experience than borrowing from a bank, but the same principles still apply. If you need a bit of extra help to get out of debt for the first time, that’s one thing.
But if you’re struggling with money and borrowing from various family members, especially if you’re unable to pay the money back, it’s likely that they will refuse you like a bank would.
In many cases, your family and friends will be there to help you. But if you abuse their generosity and support, it will not only ruin your ability to get their help. It could end up ruining your relationship.
7. Borrow from Your Life Insurance
Similar to borrowing from your retirement fund, if you have a life insurance policy, some carriers may allow you to withdraw or borrow money from that.
As long as you withdraw an amount that’s less than the value of the policy, you aren’t even necessarily obligated to pay it back.
It’s in your best interest to pay it back, of course, or else you’ll drain your death benefit and your beneficiaries will be left with nothing.
8. Move Home
If the situation is dire, and you have the option, you may want to consider moving back in with your parents for a while. They might allow you to live with them for little or no rent while you pay back your credit cards.
If you have no overhead, you can keep your head down and use your paychecks to pay off your debt.
It might not be glamorous to move back into your basement bedroom, but if you’re lucky enough to have parents who will take you back, it can be a great way to get ahead of your debt.
9. Declare Bankruptcy
Last for a reason, this should be your last resort. If your debt has become way too much to manage, filing for bankruptcy might be your only option.
In most cases, a person can only file bankruptcy once they’ve exhausted all other options, including credit counseling.
Declaring Chapter 7 bankruptcy will put a block on all your debts, while Chapter 13 bankruptcy will act in a similar way to a credit counselor and help you create a payment plan.
Regardless of the level of bankruptcy you file, it can be hard to bounce back. Bankruptcy will stay on your credit score for up to 10 years and will affect your ability to buy a house and take out loans.
If You Own a Business
If you’ve racked up credit card debt on a business card, you may be able to get a business loan. Be careful here though, because a poor credit score can not only impact you, but it can also impact your business.
Keep in mind too that certain you can claim certain expenses as tax write-offs if you’re a business owner or self-employed.
You might be able to write off some of those expenses you’ve thrown on your credit card if they were purchases related to your business.
The Bottom Line
At the end of the day, the best way to get out credit card debt is not to get too far behind on it the first place. Credit cards have high interest rates to incentivize people to pay their bills on time.
They are a great way to build credit, but it can also be very tempting to use them to spend money you don’t have. Remember, every dollar you spend has an interest rate of around $0.20 on top of it. It might not sound like much now, but it adds up.
Many use credit cards for emergencies only, or for like things like gas and groceries that they would buy anyway. Then they pay their cards off in full every month because it’s already budgeted for.
If you’ve happened to get too far behind in your payments and feel like there’s no way out, we hope this article helped you learn about ways to consolidate credit card debt. Visit our resource center for more advice.