Credit card debt can be scary, especially if you have a lot of it across many different accounts. But what if there was a way to put all that debt together and lower your payments so you can manage it more easily? Credit card debt consolidation can help.

If you are considering consolidating credit cards, use our guide to help you decide whether it is right for you, but we recommend consulting a financial professional before taking action.

What Is Credit Card Debt Consolidation?

Credit card debt consolidation is the act of compounding or combining multiple credit card balances into one single monthly payment. Ideally, it’ll have a lower interest rate than all the interest rates of your individual cards combined. This way, you can save money by paying less or no interest.

Consolidating your credit card debt can be beneficial when trying to pay off a large amount of debt, either all at once or over time. There are a couple different ways to go about starting to consolidate your debt, but there are important considerations to make before choosing this route.

Why Consolidate Credit Card Debt?

Getting out of debt could be as easy as consolidating your credit card debt. Let's look at some common benefits of debt consolidation.

Reduced interest rate

Consolidating your debts might reduce your payments by lowering your interest rate on a loan or credit card. You can pay off your debt faster if you have a lower interest rate, which means more of your monthly payment goes toward principal.

Tax-deductible interest

Interest on some equity and debt consolidation loans is tax deductible. Tax-deductible interest includes mortgage interest on both a first and second mortgage, mortgage interest on investment properties, student loan interest, and some business loans.

One monthly payment

You can simplify your payments if you group the balances together. You'll be able to track your progress instead of having to pay off multiple debts at different times. You can combine credit cards, student loans, medical bills, and more into one monthly payment.

Considerations Before Consolidating Credit Card Debt

Take a close look at your finances to decide if consolidating credit card debt is the right choice for you. Consolidating debt can simplify payments and lower interest rates for some credit card users, but it won't get rid of your debt.

You may also end up paying more due to fees, interest, and other factors. If you can't find a solution with an affordable monthly payment and a lower interest rate, it might not be for you.

Here are some factors to consider before consolidating your credit card debt.

Understand your current debt load

Debt load is the total amount of money you owe. It's important to understand what your debt load is before looking into credit card debt consolidation. By doing this, you'll be able to determine if you need credit card consolidation or if there's another option.

Here are four steps to help you calculate your debt-to-income ratio:

1. Add up your monthly debts

   To figure out your debt-to-income ratio, add up all your monthly debt payments. Rent, auto loans, and personal loans have fixed payments, so you use your regular monthly payment. If you have variable payments like credit cards or home equity lines of credit, use your minimum monthly payment. You'll see your monthly debts as well.

   If you escrow your taxes and insurance, use your regular monthly payment as PITI (principal, interest, taxes, and insurance). If you don't escrow, your lender will probably include your annual tax and insurance payments in your mortgage payment.

2. Add up your monthly gross income

   Gross income is your earnings before deductions. You’ll want to add up your monthly gross income. If you are self-employed or have income from a side job, lenders may look at your business tax returns. You'll need documentation proving your earnings if you want to borrow money from most lenders.

   If you own rental property, then you can include the mortgage payments on your rental properties as part of your monthly debts. Generally, lenders will only accept 75% of the monthly rent as income.

3. Divide your monthly debts by your monthly gross income

   For example, let's assume your monthly debt payments total $2,500 and your monthly gross income is $5,000.

   You would divide your monthly debt payments ($2,500) by your total monthly gross income ($5,000).

4. Move the decimal

   Turn it into a percentage by moving the decimal point two digits to the right from 0.50 to 50%. You would then have a total debt-to-income ratio of 50%.

Know your credit cards: credit limits, minimum payments, and APRs

Get to know the fine details of your credit cards. Understanding your credit card's terms and conditions can save you money. Every credit card comes with fine print that has information about rates, fees, and possible penalties you may have to pay. Read the fine print carefully to avoid any surprises.

Here are some key details to look for:

Credit limits

Your credit limit shows how much you can spend on a credit card or line of credit. You can find it on your statement or online account.

Monthly minimum payments

The minimum monthly payment is the smallest amount you can pay towards your credit card balance to keep a cardholder in good standing.

Standard APR (annual percentage rate)

An annual percentage rate (APR) is the estimated cost of borrowing money on a loan or a credit card. APR includes interest charges and related fees that will apply to a balance.

Balance transfers APR and fees

Balance transfers let you move debt from one card to another with a lower interest rate. Most balance transfer cards offer 0% promotional rates, but these rates eventually expire, which causes the interest rate to rise dramatically.

Fees and APRs for cash advances

A cash advance is a way to use your credit card to get cash. Most cards charge higher APRs for cash advances, and you may also have to pay other fees.

Penalty APR

A penalty APR is the interest rate you are charged if you miss or exceed a payment, or violate your cardholder agreement. Your credit card agreement will tell you when a penalty APR applies, and how much you'll have to pay.

Annual fees

There may be an annual fee for membership in your credit card program and the miles, cash back, and rewards points you get from it. Before signing up, make sure the cardholder perks are worth it.

Track and manage your spending

It’s crucial to take the time to consider your spending habits and how your finances are managed before you begin to consolidate your credit card debt. By doing this, you'll be able to see where your habits may need to change to keep your debt at a minimum. This will let you see how much credit card debt is adding to your monthly expenses.

Ways to Consolidate Credit Card Debt

Please note that this is not financial advice. There is no pressure to consolidate or eliminate your credit card debt - we are just trying to give you some ideas about how others have managed it.

Where to consolidate credit card debt?

You can get a debt consolidation loan from a bank, a credit union, or a lender of installment loans. Taking out one of these loans simplifies the payment schedule because many of your debts are combined into a single loan payment. Your current interest rate might be lowered in these offers as well.

How to consolidate your credit card debt?

Balance transfer credit cards, personal loans, and home equity products are common ways to consolidate credit card debt. A debt counseling service may be another option if your credit card debt exceeds your income. You can talk to a debt counselor about what option makes the most sense for you.

What is the best way to consolidate credit card bills?

The best way to consolidate your debt depends on your debt amount, credit score, and other factors. Ideally, you should consolidate your debt if the new debt has a lower annual percentage rate than your credit cards. By doing this, you may be able to reduce your interest costs, make your payments easier to manage or shorten your repayment period.

Need help consolidating credit card debt?

You can learn more about how to get out of debt by visiting our online resources or by visiting the DreamBank location in Madison, WI. At DreamBank, you can sign up for events that can help you learn better strategies for managing your finances to reduce your debt.

Apply for a personal or credit card consolidation loan

One way you can start to pay down your credit card debt is by taking out a personal loan. So how do you apply for a personal loan?

Review your credit score. By knowing your credit score, you’ll be able to prepare for what interest rates you’ll be offered and if you’ll need to put up collateral.

Shop around. Get prequalified with a few different lenders so you have loan options to compare.

Compare offers. You’ll want to consider interest rates, payment plans and any other incentives offered by the lenders.

Apply for the loan. Once you’ve found the best lender for your situation, go ahead and apply for the loan by filling out the application, either in person or online.

Once you have your personal loan, you can decide how you want to use it to pay down your credit card debt.

Seek guidance from a nonprofit credit counseling company

If getting started on your own is too intimidating, it might be a good idea to work with a nonprofit credit counselor. They can help create a debt management plan and take out a personal loan on your behalf, which you’d then pay back through the credit counseling organization.

Additional Options for Consolidating or Paying Down Credit Card Debt

Taking out a personal loan isn’t the only way to simplify your credit card debt. Here are a couple more options you might consider when consolidating:

Credit card balance transfer

Sometimes, credit card companies and banks offer the opportunity to transfer the balance on multiple cards to one new card, which consolidates the debt under one interest rate.

Often, these will come with a promotional APR that only lasts for a few months to a year. It could be a good opportunity to take advantage of a lower or no interest rate on your payments, but it can also affect your credit score since you’re effectively opening a new credit card when you do this.

Cash-out refinance

A cash-out refinance may be a good option for homeowners with a good credit score. This option allows you to refinance your mortgage by taking out more than you owe and using the difference to pay down your credit card debt. This option is a bit more complicated, so talk to your lender before starting this process to understand what kind of considerations you need to make.

For more information on how to get out of debt, visit our online resources or our DreamBank location in Madison, WI. At DreamBank, you can sign up for events that can help you learn better financial management strategies to lower your debt.

Retirement account loan

You may be able to use some of the funds from your employer-sponsored retirement plan to repay your debts if you are enrolled in a 401(k) or 403(b). Generally, retirement account loans do not require a credit check as long as your plan offers one. Also, rates are usually lower than at a bank or other lender. But, if you fail to meet your payments, your withdrawal may be taxed and you may be charged penalties.

Home equity loan

A home equity loan is an installment loan based on your home's value that allows you to borrow against the equity in your home. The funds can be used for college tuition, home improvement, or medical debt.

Typically, these loans have lower interest rates and fixed payments with a fixed term. However, a lump sum payment means that you may take out more than you need and decrease your home’s value in the process. If your home's value decreases, you risk becoming underwater on your loans, meaning that you can’t afford to move or sell your home. If a problem arises and you are not able to make your payments, it can result in foreclosure and the loss of your home.

Home equity line of credit

Home equity lines of credit, or HELOCs, let you borrow money against the equity in your home similar to a home equity loan. Like credit cards, HELOCs can be used whenever you need them, then repaid afterward.

HELOCs typically have lower interest rates and initial costs than credit cards, so you may be able to get a lower APR. You'll take on some extra risk for a lower interest rate, because if you can't make your payments, you might end up in foreclosure.

If you use the money to improve your home, you may be able to deduct the interest. Also, making regular and on-time payments on a HELOC can boost your credit score as it shows that you have good financial habits.

Ask friends or family members for help

The amount you owe may be small enough that you can borrow money from a friend or family member. Make sure the loan terms and repayment plan are clear, just like a bank loan.

A person you know may be able to lend you money at a lower interest rate than a bank or credit union. And you won't have to meet any minimum eligibility requirements for the loan to qualify. You should be careful when borrowing money from someone you know because it can lead to tension in your relationship as a result of the debt. Defaulting on your loan may also harm their credit score.

Does Consolidating Your Credit Cards Affect Your Credit Score?

Consolidating credit card debt can affect your credit score in many ways. When you pay off your debt, your credit score increases over time. But your credit score may also drop because of the hard inquiry that appears on your credit report after the lender checks your credit. This drop is temporary, and if you don't apply for credit too often, your credit score should recover quickly.

Managing Your Credit Card Debt After Consolidation

How you think about credit cards will affect how you manage your credit debt after consolidation. Once you have consolidated your credit card debt, you may have more room on your credit cards. But if you begin charging your cards again, you will end up paying credit card bills along with repaying your loan. Instead, stay on top of your credit cards, try to keep the balances low, and avoid taking on new credit if possible.

Practice Healthy Credit Habits

Getting out of debt isn't as easy as consolidating your credit cards. Credit card consolidation doesn't eliminate your debt. Consolidating credit cards zeros out your balances, leaving the cards open. It can be a big risk if you have been relying on your credit for a long time.

To get out of debt effectively, you should practice healthy credit habits. Avoid using your credit cards until you have at least a significant chunk of your consolidated debt paid off. Make sure to make a budget and keep it balanced to ensure you can afford all your monthly expenses without relying on credit cards.

This article is for informational purposes only and based on information that is widely available. This information does not, and is not intended to, constitute legal or financial advice. You should contact a professional for advice specific to your situation.