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How to Consolidate Credit Card Debt in 6 Easy Steps

8 minute read Woman is sitting at home and holding a black cell phone and credit card after she researches how to consolidate credit card debt.

Disclaimer: Upstart is not a financial advisor. The following content is for informational purposes only.

Feeling overwhelmed by credit card debt? You’re not alone. The average U.S. household has around $5,315 in credit card debt. Thankfully, there are options available to help you improve your financial situation.

Debt consolidation is a strategy that can help you eliminate your debt over time by consolidating all of your current credit card debts into a single payment. Using this method can help you better manage your monthly budget and potentially qualify for a lower interest rate. 

However, credit card debt consolidation isn’t right for everyone. It’s important to recognize that when done incorrectly, it could make your financial situation even worse.

We’ll help you understand if this strategy is right for you, and what steps you can take to consolidate your credit card debt today.

Step 1: Understand your current financial situation

Before you can begin the process of consolidating your debt, it’s important to make sure that you completely understand your current financial situation. Totaling all your debts and seeing that final number may feel overwhelming or emotionally difficult. But it’s a critical first step towards getting out of debt.

Here’s a quick list of what you’ll want to consider when you evaluate your financial situation:

  • The total dollar amount of all of your credit card debts
  • Your credit score and credit history
  • Your monthly income
  • The annual percentage rate (APR) on each of your credit cards

Step 2: Determine which method of consolidation is best for you

When it comes to consolidating your credit card debt, there are a few different strategies that you can use. Knowing what your existing financial situation looks like will help you determine which credit card consolidation strategy is right for you. Let’s review the top strategies.

Balance transfer credit card

With a balance transfer, you can refinance your current high interest debts by transferring your existing credit card balances to a new credit card with a 0% introductory rate. This introductory rate is typically valid for 12 to 18 months. The strategy behind this process is that the borrower will pay off as much of their balance during that introductory period as possible, saving them a great deal of money in interest fees. The remaining balance after that period will be charged a typical credit card interest rate.

Pros

  • 0% introductory rate can help you save on interest fees

Cons

  • Most balance transfer cards require an excellent credit score of (740 or higher) to qualify
  • There is typically a balance transfer fee
  • Balances not paid off during the introductory period are charged a higher APR

Debt consolidation loan

Another strategy you can use is a debt consolidation loan. With this process, you’ll take out a personal loan issued by a financial institution or online lender and use the funds to pay off your existing credit card debts with higher interest rates. The benefit of this strategy is that most personal loans will offer you a lower APR rate than you’re currently paying on your credit cards. 

With some lenders, you may be able to prequalify for a loan that will allow you to see what loan amount and rate you qualify for before applying and without impacting your credit score.

Pros

  • Lower APR than existing credit cards
  • Fixed monthly payments
  • Some lenders will directly pay your creditors for you

Cons

  • If you have a very low credit score, you might not be able to get a debt consolidation loan
  • You may be charged an origination fee with some loans

Debt management plan

Another option for consolidating credit card debt is enrolling in a debt management plan. This program is a professional service offered by certified credit counselors. You’ll work with the counselor to consolidate your debts into a single monthly payment, with a lower interest rate, that you can afford to pay. The counselor will then work with your creditors to negotiate or eliminate interest charges on your behalf.

Debt management plans are a favorable option for individuals with lower credit scores who may have trouble qualifying for other options. Unlike other options, these plans will not impact your credit score.

Pros

  • You’ll have the same fixed monthly payments throughout the loan term
  • Interest rates will be lower 
  • Any credit score qualifies and enrolling in the plan will not impact your score

Cons

  • You may be charged an origination fee, monthly fee, or annual fee for the service
  • Depending on the debt amount and strategy you use, it can possibly take you around 3 to 5 years to repay your debt

Consolidation options to be cautious of

You may come across a few other options when considering consolidating your credit card debt. However, most financial experts will warn you to be cautious of these riskier methods.

Let’s take a look at those options and why you may want to avoid them. 

  • Home equity loan or home equity line of credit (HELOC). With a home equity loan or line of credit, you’re borrowing against the equity in your home. While there are no restrictions on what you can use these funds for, think twice before using this option for debt consolidation. With a home equity loan, your house is used as collateral on the loan. So if you default, the lender has the right to foreclose on your home. If that happens, you will still have the debt–but no home.
  • 401(k) loan. If you have existing savings in a 401(k) employer-sponsored retirement plan, you may be tempted to use these funds as a means of consolidating your other debts. You can take out a loan against your 401(k); however, if you default on your payments the amount you withdrew will be taxed and penalized. You also won’t be earning interest on the funds that you borrowed, which will slow your retirement growth potential.

Step 3: Choose a provider for your method

Whichever method you choose, there are a few things you’ll want to consider when choosing a provider for your services. Whether you’re looking for a balance transfer card, a personal loan lender, or a debt management plan, each will offer its terms and conditions. You’ll want to compare each one carefully to ensure that it’s the right one for you.

Understand their fees and terms

When choosing a provider, ask them to explain all costs and fees associated with their services. Many providers will have origination fees that you’ll be responsible for covering. You’ll also want them to explain the terms of the agreement that you’ll be signing. You must understand all the conditions and the terms.

For example, you’ll want to know if the loan or credit card is secured or unsecured. Having a secured term could mean the lender requires you to use a home, car, or another valuable item as collateral. You should also ask how long your repayment term will be so that you understand how long you’ll be making payments.

Compare the offers

When choosing a provider, it’s important to compare the different offers from each lender. You’ll want to choose the offer that best matches your budget and is most likely to help you reach your goals. 

Be sure to compare APR rates, each lender’s requirements, and what features and assistance the lenders can provide to you.

Decide if a bank or online lender is right for you

You’ll want to consider whether using an online lender or a traditional financial institution is right for you. If you prefer talking to an individual face-to-face or would rather deal with a local bank that you have worked with before, you’ll likely be more comfortable working with a financial company that has a physical presence and real people to interact with. 

But if you prefer the convenience of applying for a loan from the comfort of your own home or want a lender with more convenient features, using an online lender such as Upstart might be the better option for you.

Step 4: Make sure you understand (and avoid) common pitfalls 

It’s important to recognize that debt consolidation may not be right for everyone and certain pitfalls can occur during the process. Let’s take a look at some of the most common things to avoid so you can be successful in consolidating your debt.

  • Avoid making new charges. One of the most common issues individuals have when consolidating credit card debt is that they continue to make new charges on their credit cards. This can set you back even further in your goals and will ultimately make your debt situation worse. The best way to avoid this is to set a monthly budget that you are confident you can consistently stick with. It should accommodate all of your monthly bills, expenses, and debt payments. Establishing a budget will also help you find ways you can cut back on your spending.
  • Be cautious about transferring unsecured debt to secured debt. Transferring your debt from an unsecured credit card to a secured loan can be risky if you’re not careful with your repayment strategy. Having to put collateral down for a secured loan means you could be at risk of losing that asset if you find yourself unable to repay your loan.
  • Understand the difference between debt consolidation and debt settlement. It’s important to understand that these are two very different methods of managing  debt. Debt consolidation helps you better manage your debt by consolidating all your various  payments into one until you have paid your debt back. Debt settlement eliminates them almost entirely. But big caution here–settling your debts will leave a negative mark on your credit report that will remain there for seven years. We advise that you consider debt settlement only after you have exhausted all other options and that you use it only for debts that are in collections.
  • Continue to monitor your credit. Because mistakes and errors can occur on credit reports, it’s important that you continue to monitor your report even after all your debts have been paid off. If you find any discrepancies on your credit report, be sure to report them to the credit reporting bureau immediately. Following your report closely will help you take control of your finances and understand the positive impact that paying off your debt can have.
  • Don’t be afraid to ask for help. It’s human nature to want to solve a problem on our own, but sometimes we need extra help. Don’t be afraid to ask for it when you need it. Financial advisors are available to assist you and can help you through the entire process.

Step 5: Consolidate your debt

Once you’ve chosen the right method for your needs and have selected a lender, it’s time to start consolidating and paying off your debts. Here are the steps in the process for each method.

Balance transfer card

  1. Apply for the card. Once you’ve chosen the card that best fits your needs, you can start your application. Be sure to only apply for one card because applying for multiple cards can potentially negatively impact your credit score.
  2. Transfer your balances. Once approved and you receive your new card, the servicer should be able to assist you with transferring your existing balances over to the new card. You’ll just need to give them the account information for each card. The servicer will inevitably charge a fee with each transfer.
  3. Pay down your debt. Now that your credit card debts are consolidated into one single payment, you can begin paying down your debt.

Debt consolidation loan

  1. Apply for the loan. Once you’ve chosen the loan that best fits your needs, you can start your application and wait for your approval.
  2. Pay off your balances. After you’ve been approved and have received your funds, you can pay off your existing credit card balances with these funds. Some lenders may automatically pay your creditors on your behalf.
  3. Continue making your monthly payments. Now that you have paid off your balances on your credit cards, you’ll just need to make sure you pay your lender every month through the end of your loan term. 

Debt management plan

  1. Contact a credit counseling agency. Once you’ve chosen a credit counseling agency, it’s time to contact them and set up a meeting to discuss your current financial situation and goals.
  2. Set your monthly payment. Your credit counselor will then work with you to set a monthly payment that fits your budget and needs. They will also contact your creditors to negotiate and eliminate your interest charges.
  3. Start your debt management plan. After you’ve set everything up, you will then make your monthly payments directly to the counselor, who will distribute your funds to your creditors each month on your behalf.

Step 6: Monitor your progress and adjust as needed

Consolidating your credit card debt is only the first step in the long process of becoming debt-free. To be successful, you must change your financial habits and continue to monitor your progress over time. 

If you find that your current plan isn’t working for you, make changes. Debt consolidation is not a one size fits all process. It may take time to find the right option for you. 

If you’re ready to start consolidating your debts, consider applying for a credit card consolidation loan through Upstart today.

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