What is the smartest way to consolidate debt?

Consolidation loans do hurt your credit in the short-term because the lender will do a hard inquiry into your credit when you apply, dropping your credit score by 5 to 10 points, and your total debt may go up. But even though a consolidation loan will hurt your credit at first, it can lead to a much higher score over time.... read full answer

You can estimate how a debt consolidation loan might hurt or help your credit by using WalletHub's free credit score simulator tool.

How a Debt Consolidation Loan Can Help Your Credit

Ideally, your debt consolidation loan will have a lower interest rate than your original debts, which means interest will accrue less quickly and you will be able to get debt-free sooner. Paying off your debts in full will increase your credit score.

In addition, every month as you make payments on your debt consolidation loan, the lender will report information about the loan to the credit bureaus. If you always pay on time, you should see your credit score steadily increase over the life of the loan. If you miss payments or default on the loan, that would hurt your credit.

The best way to consolidate debt is to take out a new loan or credit card that has a lower APR than all of the original debts and then use it to pay off the original debts. This turns multiple monthly payments into one and reduces the cost of the total amount owed, allowing the borrower to get debt-free sooner. The best debt consolidation options will not charge any fees to complete this move, either.... read full answer

4 Ways to Consolidate Debt

Credit card

Doing a balance transfer to a credit card is the best way to consolidate debt when you owe a relatively small amount and will be able to pay it off within a year or two. Balance transfer credit cards typically have credit limits of $500+, and introductory 0% APRs on balance transfers tend to last for 12-20 months.

Personal loan

A personal loan is the best way to consolidate debt for people who can’t or won’t use a home as collateral but still need more funding than a credit card might provide. Plus, personal loan APRs are often lower than the regular APRs on credit cards, so they’re also good for balances that can’t be repaid quickly. Personal loans usually take only about a week to get, too, so you can consolidate sooner than with a home equity loan or HELOC.

Home equity loan

A home equity loan is the best way to consolidate debt if you’re a homeowner who owes a lot and needs a long time to pay it off. It’s also a good choice if you want to score the lowest APRs possible for multiple years. Home equity loans are much cheaper than personal loans, on average, but they require the borrower’s house as collateral. So you have to be confident in your ability to repay a home equity loan.

Home equity line of credit (HELOC)

A HELOC is the best way to consolidate debt for people who want to borrow multiple times without applying for a new loan. HELOCs have a draw period during which the user can borrow, up to their available credit, at any time. HELOCs also require a house as collateral, which means there’s a lot of risk for borrowers.

Best Ways to Consolidate Debt Compared

Best Way to Consolidate Debt Without Hurting Your Credit

The only way to consolidate debt without any credit score damage is having a friend or family member pay it off for you, then owing the debt to that person. That said, debt consolidation doesn’t usually affect your credit much.

Applying for a loan or line of credit should only drop your credit score by 5 to 10 points. And even if debt consolidation hurts your credit in the short term, it can lead to large long-term gains. You’ll be able to reduce your debt load more quickly and build up a good payment history, both of which will help your score.

Other Ways to Consolidate Debt

There are a few other ways to consolidate debt, but they’re not ideal. The first is to use a debt consolidation program. With this option, you don’t take out a loan. Instead, you make one payment per month to a company, which distributes the funds to your creditors. The company also negotiates on your behalf to try to get lower rates. But you’ll have to pay fees to the company, and you may suffer credit score damage because the program might not negotiate with creditors until you have missed a few payments.

Another option is to borrow from your retirement account. But you’ll end up having to pay interest into your account to make up for the time the money wasn’t invested. In addition, you’ll need to pay the loan back in 5 years or face an early withdrawal penalty. The timeline moves up if you lose your job, too. In that case, you’d need to pay the money back by the tax day for the year in which you lost your job.

Ultimately, the best way to consolidate debt for most people will be a personal loan because it provides decent funding amounts and APRs without requiring any collateral. To check your chances of getting approved for a personal loan, along with what rates you might qualify for, use WalletHub’s free pre-qualification tool.

The four main ways to consolidate credit card debt are: 1) using a personal loan; 2) borrowing against your home equity; 3) transferring your balances to one credit card; and 4) joining a debt consolidation program. Those are actually the options for consolidating all types of debt, not just credit card debt. The option that is best will depend on what interest rates you can qualify for, how much debt you need to consolidate, what your credit rating is and more.... read full answer

Credit card consolidation is when you borrow money to repay balances owed on multiple credit cards. As a result, you owe one just lender and make a single payment each month. Credit card debt consolidation can also help you save money on interest and pay off what you owe faster. But you need to qualify for a big enough loan or line of credit with a low enough APR for it to be worthwhile. The higher your credit score is and the more income you have, the better your chances will be.

Debt consolidation does not reduce your starting balance, though – in fact, it might increase it because of origination fees or balance transfer fees. If you’re trying reduce what you owe, you need to look into debt settlement instead.

How to Consolidate Credit Card Debt: Popular Methods

• Personal loan: Take out a loan for the amount of your existing debts and use the loan to pay them off. Ideally, the new loan should have a lower interest rate than your existing balances. But getting a big loan with a low interest rate is difficult without good or excellent credit. The average 24-month personal loan has an APR of about 10%, according to the Federal Reserve. But interest rates on personal loans for fair-to-good credit range between 6% and 36%.

• Home Equity: Home equity loans and home equity lines of credit use your home’s value (minus the amount left on your mortgage) as collateral. This can get you the money needed to consolidate your credit card balances at a low rate (4% to 8%). But you also risk losing your house if you default.
• Credit card balance transfer: A balance transfer allows you to move your credit card balances to a new credit card. You can’t transfer more than the card’s credit limit. There’s often a balance transfer fee of 3% to 5%, too. Balance transfer cards for people with good or excellent credit typically offer a 0% APR for a certain number of months, which lets you pay down the balance without accruing new interest.
• Debt consolidation program: With a debt consolidation program, you make one monthly payment to a company, which then distributes that money to your creditors. The company also negotiates with your creditors to lower your rates. In return for the negotiating power and the convenience of making only one payment, you will need to pay a setup fee and monthly fees. Some programs are nonprofit and their fees are minimal.

Consolidating Credit Card Debt with a Credit Card

While personal loans and home equity loans can be effective ways to consolidate credit card debt, using a balance transfer credit card provides a lot of value both right away and into the future. Many balance transfer credit cards have 0% introductory APRs, for starters. Plus, even after you pay off all your debts, you still have the card’s credit line to draw on any time you need it. And while loans build credit until they are fully paid, a credit card builds credit indefinitely as long as you keep it open.

To consolidate credit card debt with a credit card, first make a list of all the debts you need to consolidate. Then, check your credit score to see which balance transfer cards you’re eligible for. Next, compare the cards, apply for the one whose terms best fit your needs, and give the issuer the account numbers of your original balances along with the amounts to transfer. You can either request the transfers on the card’s application or after you’re approved. Finally, wait up to 3 weeks for the transfers to process, continuing to make payments to your old issuers as you wait.

Keep in mind that if you request balance transfers on your account application and the amount ends up exceeding your available credit, the issuer will typically process as much as will fit on the card. But it’s possible they might give you a call to ask which balances you want them to prioritize.

Once the balances get transferred, you’ll have to make at least a minimum monthly payment to the new credit card’s issuer. But if your card has a 0% introductory APR, you won’t owe any interest until that period expires, as long as you pay the minimum by each due date along the way.

Deciding How to Consolidate Your Credit Card Debt

If your credit card debts are on the smaller side, a balance transfer is probably your best bet. If you need a larger amount than you think you’d get with a balance transfer card, try a personal loan.

Many of the best balance transfer cards have minimum credit limits of $500 - $1,000. While it’s absolutely possible to get higher limits if your credit and income exceed the card’s requirements, it’s not guaranteed. So if you need a large sum of money, it might be better to request a loan for the specific amount you need, assuming your credit is good enough to qualify for that amount. Home equity should probably be your last resort because of the risk.

Check out WalletHub’s article on debt consolidation for even more in-depth information.