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How To Consolidate Credit Card Debt

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Credit cards can be convenient, but there may be times when streamlining payments, instead of making payments on several credit card bills, could be worth considering.

With a debt consolidation loan, you can combine multiple existing eligible debts - it doesn’t have to be credit card, but it could be - into a single monthly payment.

Credit card debt – the unexpected expenses Americans worry about

Let’s take a step back to understand why so many Americans find themselves in a position of needing to find a way to consolidate credit card debt.

Sometimes, life just happens. Maybe it was a root canal or a few spontaneous vacations, but nearly 2 in 5 creditworthy Americans find themselves currently in credit card debt.

With a credit card, you can make numerous transactions and spend up to your credit limit. You just need to be sure to stick to the terms of your credit card agreement, make your payments on time, and stay within your credit limit. But even if you make all your monthly payments on time, you could still end up putting unexpected expenses, like surgery for a torn ACL, on your credit card, which can feel stressful.

This is where credit card debt consolidation with a personal loan comes in handy. 77% of creditworthy Americans who are currently in credit card debt don’t know that a personal loan can be used to pay off that debt.

Credit reports do not contain credit scores, but there are some other key items to look for.

How should I start to consolidate credit card debt?

Before choosing one credit card debt consolidation option over another, you’ll want to check a couple of things.

First, it’s smart to check your past credit reports for any errors. If you find any, be sure to dispute them. Any errors on your credit report could prevent you from being approved for the consolidation option you are considering.

Good to know: There are a few different agencies that you can use to check your credit report for free. You can get a free credit report every year from TransUnion, Experian and Equifax - the 3 major credit reporting agencies. Interestingly, credit reports do not contain credit scores, but there are some other key items to look for (and make sure are accurate).

Those items include your credit utilization ratio, your credit limit, the amount you may owe on an account, the account balance, and your on-time and late payment history.

Second, you also want to make sure you have enough debt to make consolidation worth it. If your debt is small enough that you have the ability to pay it back within a year, the process of consolidating your debt may not be worthwhile.

If you have a good or excellent credit score you may find rates on personal loans to be lower compared to your credit cards.

What are the different ways to consolidate credit card debt? 

Personal Loans

One way to consolidate credit card debt is with a personal loan. The money from the loan is used to pay off your existing credit card debts, leaving you with a single payment that you make in installments.

You typically receive the funds from the loan all at once in a lump sum and have a set period of time to pay off the loan. If you have a good or excellent credit score you may find rates on personal loans to be lower compared to your credit cards, meaning you’ll be paying less in interest (as long as you’re not adding to your existing debt!).

Personal loans also may have fixed payments so you know exactly how much you’ll be paying each month. Plus, with an unsecured personal loan, you don’t have to pledge any of your possessions to secure the loan, so you don’t run the risk that your home or car will be repossessed by the lender.

Learn more about Personal Loans vs. Credit Cards.

Balance Transfer Credit Cards

Another way to consolidate credit card debt is moving it to a balance transfer credit card. Though you can consolidate credit card debt with a balance transfer card, issuers may not allow you to consolidate other kinds of debt.

Make sure that whichever credit card you use to consolidate your credit card debt has a high-enough credit limit. Unless you have a limit that is high enough to match the amount of credit card debt you’re moving over, you may be able to move over only a portion of your outstanding credit card debt. 

Keep in mind that you won’t necessarily know your credit limit until you’ve already been approved because your credit limit is determined by numerous factors on your application.

Also, it’s important to note that some balance transfer credit cards charge a fee to transfer a balance. For example, if you’re transferring $12,000 and there’s a 5% fee to transfer, you’ll have to pay $600 in transfer fees.

One key advantage of balance transfer credit cards is that you won’t run the risk of having any of your possessions repossessed by the lender, which may not be the case with other consolidation methods, such as a home equity loan.

Learn more about Balance Transfer vs. Personal Loan.

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See how you could simplify your credit card debt into a single loan with a fixed rate.

Home Equity Loans

Home equity loans are another way to consolidate credit card debt. Although getting a significantly lower interest rate compared with other types of loans is possible through this option, it could be a risky proposition.

If you fail to pay back this type of loan, your lender has the right to take away your home.

Yes, your home.

With a home equity loan, you’re borrowing against your house. So if you fail to pay back the loan - known as defaulting - the lender has the right to take your home and resell it as payment for the amount you owe.

Learn more about Home Equity Loan vs. Personal Loan.

Retirement Plans

Another possible option for paying off your existing credit card debt is withdrawing or borrowing money from an employer-sponsored retirement account, like a 401(k).

If you decide to take out money early from a 401(k) to pay off your credit card debt, you could be hit with hefty withdrawal fees and income taxes on the amounts you withdraw.

With a 401(k), withdrawing funds before the age of 59½ will incur a 10% fee, which, if you’re taking out large sums of money, could be quite a bit out of your funds. In addition, because a 401(k) is tax-deferred, any amounts you withdraw are added to your taxable income for the year in which you withdraw the funds.

Certain 401(k) plans also allow you to take out a loan against the funds in your account. For this, you are generally able to access the funds in your account, up to a certain amount, on a tax-free basis so long as you agree to repay the amounts you borrow back into your account by a certain date.

Essentially, you’re giving yourself a loan from your 401(k). The main advantage of doing this is to avoid having to pay any early withdrawal fees and income tax.

Just remember, it’s your money, so if you don’t pay it back, you’ll end up losing money you could use for retirement and your loan will be considered defaulted. That'll result in the loan being treated as a withdrawal, potentially subject to an early withdrawal penalty if you’re not 59½.

Remember, too, that this is your retirement account, and removing funds from it - even to consolidate credit card debt - could negatively affect long-term retirement plans.

Learn more about Borrowing Against Your 401(k).

Debt management plans could help you gain control over your credit card debts or debts from outstanding loans.

Debt Management Plan

A debt management plan - or DMP - is a method of paying down your debt through monthly payments via a debt management company.

A debt management plan allows you to make monthly payments to your debt management company, who then makes monthly payments to your creditors on your behalf.

Debt management plans could help you gain control over your credit card debts or debts from outstanding loans.

But you’ll have to close each of your credit card accounts and start making monthly payments to the agency itself.

The agency will serve as your middleman, paying your credit card lenders on your behalf. But since you’ll have to close your credit card accounts, your credit score will likely take a hit.

And because you are forced to close every credit card account, you won’t have credit cards available for emergency expenses.

Moving forward

Once you’ve settled on the way you would like to consolidate credit card debt , it’s a great idea to go into it with a plan. Set attainable goals, like “I’ll be debt free by ___,” and stay on top of your payments.

One last thought on credit card consolidation

Just because there’s no magic formula to make your debt disappear doesn’t mean there aren’t plenty of smart strategies for tackling it head-on.

It’s never too late to learn, and it’s never too late to start getting out of debt with a debt payment plan.

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.