12 min read
Key Takeaways
- Debt consolidation combines several credit card balances into one new loan or account, so you have one payment to manage.
- A debt consolidation loan is a personal loan you use to pay off your cards. Then you repay it with one fixed monthly payment.
- Before you consolidate, gather each card's balance, annual percentage rate (APR), payment, and fees.
- Balance transfer cards and home equity loans are other options, but they come with different costs and risks.
- Once your cards are paid off, try not to run the balances back up.
Juggling several credit cards means keeping track of different interest rates, payments, and due dates. And when interest keeps piling on, it can feel like you're making payments every month without getting anywhere.
Debt consolidation brings those balances together into one new loan or account. With the right terms, it can give you one simple payment, a lower interest rate, and a clear date when you'll be debt-free.
Here's how it works, the six steps to consolidating debt with a personal loan, and a few other options worth considering.
Table of Contents
What Is Credit Card Debt Consolidation?
Credit card debt consolidation means combining balances from two or more credit cards into one new loan or account.
The most common way to do it is with a debt consolidation loan, which is a personal loan you use to pay off your cards. Instead of making several card payments each month, you make one fixed payment on your new loan.
Keep in mind that consolidation doesn't erase what you owe. It changes how you pay it back, ideally in a way that's easier to manage and costs you less.
Why Consolidate Credit Card Debt?
Not sure if debt consolidation is a good idea for you? It makes the most sense when the new loan gives you a better deal than what you have now. Benefits can include:
- One monthly payment instead of several
- A lower interest rate, which can save you money
- A lower monthly payment, depending on your loan terms
- A fixed payment that won't change
- A set payoff date, so you know exactly when you'll be done
Before you decide, compare the interest rate, fees, monthly payment, and how long you'll be paying. A lower payment isn't always a better deal. If it comes with a much longer loan term, you could end up paying more in interest overall.
How to Consolidate Credit Card Debt With a Personal Loan
A debt consolidation loan gives you a lump sum to pay off your credit cards. Then you repay the loan in fixed monthly payments over a set amount of time. Here's how to do it.
Step 1: Add Up Your Credit Card Debt
Start by listing every card you want to consolidate. For each one, write down the:
- Balance
- Annual percentage rate (APR)
- Minimum monthly payment
- Due date
- Annual or other fees
Add up the balances to see about how much you'll need to borrow.
Tip: You don't have to consolidate every card. If one card already has a lower interest rate than the loan you're considering, it may cost less to leave that balance where it is.
Step 2: Check Your Credit
When you apply, the lender will review your credit report, which affects whether you're approved and what rate you're offered. Before you apply, take a few minutes to see where your credit stands.
If you're a WEOKIE member, you can check your score anytime with our Free Credit Score, right in Online or Mobile Banking. It's free, there's no separate login, and checking won't affect your score. You'll also see your full credit report and what's helping or hurting your score.
It's also a good idea to get your free credit reports from all three bureaus at AnnualCreditReport.com and check them for mistakes. If something looks wrong, you can dispute it with the credit bureau before you apply.
Step 3: Compare Debt Consolidation Loan Terms
The interest rate isn't the only thing to compare. For each loan, look at the:
- Annual percentage rate (APR): the yearly cost of borrowing, including interest and certain fees
- Monthly payment
- Loan term: how long you'll be making payments
- Origination or application fees: one-time fees to set up the loan
- Total amount you'll repay
- Prepayment penalties: fees for paying off the loan early, if any
A shorter term usually means a higher monthly payment but less interest overall. A longer term lowers your payment but usually costs more in the long run.
Good to know: WEOKIE debt consolidation loans have no prepayment penalties, so you can pay yours off early without extra fees.
Step 4: Apply for a Debt Consolidation Loan
When you're ready to apply for a debt consolidation loan, have this information handy: a photo ID, proof of income, your employer's information, your monthly housing payment, and details about the debts you're paying off. Before you sign, double-check the final interest rate, payment, fees, and loan term so there are no surprises.
Step 5: Pay Off Your Credit Card Balances
Once you receive your loan money, use it to pay off the cards in your plan. Keep making your regular card payments until each payoff goes through. Then check each account one more time for leftover interest or new charges before you consider it paid in full.
Step 6: Follow Your New Repayment Plan
Now you'll make one payment each month on your new loan. Setting up automatic payments can help you stay on track.
Try not to build up new balances on the cards you just paid off. Otherwise, you could end up paying both your new loan and new credit card debt at the same time.
Other Ways to Consolidate Credit Card Debt
A debt consolidation loan isn't your only option. You can also use a balance transfer credit card, a home equity loan, or a home equity line of credit (HELOC). Each one works a little differently and comes with its own costs and risks.
|
Method |
How It Works |
Potential Pros |
Potential Cons |
|
Balance Transfer Credit Card |
Move your card balances to a new card, often with a low introductory rate. |
A low intro rate can cut interest for a set time. No collateral is needed. |
Transfer fees may apply. Your limit may not cover all your balances. The rate goes up after the intro period. |
|
Home Equity Loan |
Borrow a lump sum using your home’s equity. |
Often a lower rate than credit cards. WEOKIE offers a fixed rate and a choice of 5, 7, or 10-year terms. |
Closing costs may apply. The process takes longer. Your home is collateral. |
|
HELOC |
Borrow as needed from a credit line using your home’s equity. |
Often a lower rate than credit cards. You only pay interest on what you use. WEOKIE’s HELOC has a fixed rate. |
Your payment changes with your balance. If you only make minimum payments, you’ll owe the remaining balance at the end of the term. Your home is collateral. |
How a Balance Transfer Works
With a balance transfer, you open a new credit card and move your existing balances onto it. If the card has a low introductory rate, you'll pay that rate for a set period of time.
Before you apply, check the transfer fee, how long the intro rate lasts, your credit limit, and the rate you'll pay once the intro period ends. Keep paying your old cards until each transfer is complete.
A balance transfer works best when your new credit limit covers what you want to move, and you have a realistic plan to pay it off before the intro rate ends.
How Home Equity Consolidation Works
With a home equity loan or HELOC, you borrow against your home's equity, which is the difference between what your home is worth and what you still owe on it. Then you use that money to pay off your cards.
Because the lender needs to review your home's value along with your income and debts, the process usually takes longer than applying for a personal loan or credit card.
The most important thing to know is that your home is collateral. If you can't make your payments, you could lose your home. Be sure you're comfortable with the payments and terms before using home equity to pay off credit cards.
Can I Still Use My Credit Card After Debt Consolidation?
Yes. If you keep the account open, you can still use the card after it's paid off.
The real question is how you'll use it. New charges mean you'll have card payments on top of your consolidation loan, which can undo the progress you've made.
You also don't have to close a paid-off card. Closing it can lower your total available credit and shorten your credit history, and both can affect your credit score. Think about your credit and your spending habits before deciding what to do with the card.
Why Consolidate Debt With a Credit Union?
As a not-for-profit, member-owned credit union, WEOKIE is here to help you get ahead, not stay in debt. Our debt consolidation loans can bring your credit card balances into one fixed monthly payment with a clear payoff date.
Not sure if consolidation is right for you? Stop by any WEOKIE branch or give us a call. We'll look at your balances with you and help you decide on the best next step.