Credit Card Consolidation 101

How to Consolidate Credit Card Debt

If you’ve ever used a credit card before, you’ve probably thought, “This almost seems too easy.” Well, not only is it easy to use a credit card, but also it’s easy to go into debt using one.

However, through some smart and careful planning, credit card debt consolidation could help you simplify your existing credit card debt. Debt consolidation typically involves combining multiple existing debts into a single monthly payment.

Let’s look at credit card debt as you would your minivan after a road trip with the family. Odds are there’s a layer of fruit snacks under the seats, piles of movies without their cases strewn about and a strange new smell you didn’t ask for.

Just like cleaning up your messy minivan after that family road trip, addressing your credit card debt can feel daunting at first, but tackling the problem head-on could make the situation a lot more manageable.

Where should I start?

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

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.

Quick Fact: There are a few different agencies that you can use to check your credit report for free. You can get a free credit report from TransUnion, Experian and Equifax—3 major credit reporting agencies. Keep in mind, you get only 1 free credit report from each agency per year.

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.

What are my options for credit card consolidation?

Personal Loans

With a personal loan for credit card debt consolidation, 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 few years to pay off the loan. The rate on the loan may be lower compared to your credit cards, meaning you’ll be paying less in interest. Since personal loans typically allow you to make extra payments toward the principal at any time without penalty, you could put the amounts you save in interest toward paying down your debt faster.

Personal loans may have fixed payments so you know exactly how much you’ll be paying each month. And unlike some other debt consolidation options, going with a personal loan could actually boost your credit score in the long run.

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.

Balance Transfer Credit Cards

Another option for consolidating credit card debt is moving it onto a balance transfer credit card. Though you can consolidate credit card debt, 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.

Home Equity Loans

Home equity loans are another means of credit card debt consolidation. 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.

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, which will 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.

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 method of credit card debt consolidation that’s right for you, 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.

See how Marcus could help

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 Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.