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3 Ways to Consolidate Credit Card Debt

Struggling to pay off credit card debt? Three ways you can consolidate credit card debt that may help you on the path to financial freedom.

You’ve maxed out all your credit cards and now find yourself struggling to pay off credit card debt. It’s a bad spot to find yourself in, and you should know that you’re not alone. According to Forbes, in the wake of COVID-19, credit card debt is on the rise.  Currently, 47% of all Americans now carry credit card debt—meaning 120 million people. Among those people, 23% of them (i.e. 28 million Americans) have added to their credit card debt as a direct result of the pandemic and its economic aftermath.

Between new economic stressors, the amount you owe, and the high interest rates, you may feel overwhelmed. But it’s important to know there are ways to pay off credit card debt. Here are 3 ways to consolidate your credit card debt and how each can help you gain control of your financial wellness again.

Why Consolidate Credit Card Debt?

credit card debt

Before we look at how to consolidate credit card debt, let’s first look at what debt consolidation is overall. Why would you want to consolidate all of your debt into one lump sum? Because it can help make it more manageable to pay off.

If you have multiple cards with high balances and interest rates, consolidating those balances into one monthly payment simplifies the payoff process thereby making monthly payments more manageable.

Ideally, debt consolidation works best when the loan or line of credit you get has a lower interest rate than your current credit cards. The lower rate allows you to save money in the long run and possibly pay off credit card debt sooner.

Important note: If you decide to consolidate your debt, make sure the repayment term is a length you are financially comfortable with. It is best to be realistic about how much you can afford to pay per month so you don’t find yourself back where you started.

How you can Consolidate Credit Card Debt

Now that you have a better idea about how debt consolidation works, it is important to explore which option would work best for you. From personal loans, to a home equity line of credit (HELOC) to balance transfer cards, let’s explore three ways you can consolidate your credit card debt.

1.   Apply for a Personal Loan

A personal loan is a specific amount of money you borrow from a lender that is paid back in fixed monthly payments, typically over a period of 3 to 5 years. 

Most personal loans are unsecured, which means you won’t have to use your car or home as collateral. But personal loans can have higher interest rates than other debt consolidation options. That said, unlike your credit cards, a personal loan has a fixed rate, so it will never get any higher in the duration of your payback period.

So, let’s say you earn $34,000 a year, and that $30,000 personal loan you got approved for has a 9.41 percent interest rate—an amount that’s currently the national average, according to Experian. If your repayment term is three years, the lender will expect to pay around $960 per month to cover the full amount and the interest, which stands at $4,550 for the three-year term.

Finding an unsecured personal loan with a lower interest rate can be possible, but you have to shop around or have a peer-to-peer lender compare rates for you.

Important note: You have to be very good at keeping up with monthly payments. If you aren’t careful with a personal loan, you could be swapping one form of debt for another.

2.   Apply for a HELOC

Homeowners who are saddled with credit card debt may be able to use their home equity to settle outstanding balances. They do this by applying for a home equity line of credit, or HELOC.

A HELOC lets you tap into the equity you’ve built in your house or the difference between how much you owe on your home and your home’s value. If your home is valued at $400,000 and the balance on your mortgage is $160,000. That means you have $240,000, or 60%, in equity.

A home equity line of credit, or HELOC is similar to a credit card as it offers a revolving line of credit. You only have to pay back what you use, plus interest. Because the interest rate may be lower and a HELOC can offer you access to a larger sum of money, this could be an option to consolidate your credit card debt.

Important note: Unlike an unsecured personal loan, a HELOC uses your home as collateral. If you are not able to pay on time, you could lose your home.

3.   Apply for a Balance Transfer Credit Card

The third option to consolidate credit card debt is to get another credit card. Yes, it sounds counterintuitive, but a balance transfer credit card allows you to transfer the balances from high-interest cards to a credit card with an introductory offer of little to no interest. 

This sounds ideal, right? It can beif you are able to pay off the card before the introductory period ends. But, because the low-to-no interest rate is only offered for a certain amount of time, if you don’t pay off the balance before it expires, the remaining balance will be subject to the card’s regular rate. That could be as much as 16%, the current national average.

Important note: Some cards charge a balance transfer fee that can be as much as 3-5% of the total amount you transfer. This fee is added to your total balance. Because the amount you transfer plus your balance fee can’t be higher than the credit limit of the card, it may not cover all of your debt.

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HELOCs through Prosper may not be available in all states. Please carefully review your HELOC credit agreement for more information.

All HELOCs are underwritten and issued by Spring EQ, LLC, an Equal Housing Lender. NMLS #1464945.

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