If you’re considering credit card debt consolidation, here are some options to consider.
Balance transfer card
How it works
With a balance transfer, you move the amount you owe on your current credit cards over to a new credit card. Many credit card companies offer 0% balance transfer options to encourage people to use them to consolidate debt on a new card with no interest for a limited period of time (for a small fee).
Who it’s good for
A 0% balance transfer offer can be a good option for people with relatively small credit card balances who just need a small respite from interest payments to catch up. The 0% introductory rate on a balance transfer card must last at least six months if you make your payments on time.
But you need to be disciplined and pay off your balance before the 0% period expires, otherwise you could be on the hook for interest from the entire promotional period.
Pros of balance transfer cards for debt consolidation
- Low initial interest rate: Many balance transfer cards offer 0% or low interest rates for a period of time, often up to 18 months.
- More money goes to reducing debt: Since you’re paying no interest for a short period, all the money you pay during this time is going toward reducing the principal of your debt instead of paying interest.
- One payment: Just like with the personal loan, if you move all your balances to a new balance transfer credit card, you’re left with a single monthly payment.
- Fees can add up: Balance transfer fees are typically based on a percentage of the overall credit card debt you transfer. If you have large balances, this can be costly.
- Interest rates can rise: If you don’t make all your payments, your credit card company can start raising the interest rates on your balance transfer card. After the introductory period, your rates on whatever you have left to pay will rise as well.
- Might hurt credit score: If you’re already pushing your credit limit, using a balance transfer card could ding your credit score.
Personal loan
How it works
A personal loan generally refers to an unsecured, fixed-rate installment loan you get from a bank, credit union, or other lenders. This means you’ll pay back the loan with a set monthly payment, and it does not use your home as collateral.
Who it’s good for
Personal loans can be a good option if you’re juggling multiple credit cards with high interest rates and high minimum payments — and have enough income to cover your new payment. It’s especially good for people with a high enough credit score to qualify for the lowest interest rates.
Pros of personal loans for debt consolidation
- One fixed payment: If you consolidate your credit card debt with a personal loan, you’ll now have a single payment each month that won’t change over time.
- Lower interest rates: Personal loans tend to have lower interest rates than credit cards, meaning your monthly payment will often be lower if you consolidate your credit card debt using a personal loan.
- Unsecured loan: You don't have to risk your home if you fail to make payments, as you would with something like a home equity loan.
Cons of personal loans for debt consolidation
- Lender fees: Personal loans typically come with significant fees that drive up your costs.
- Higher interest rates than some options: Because personal loans are unsecured, you’ll generally pay a higher interest rate than you would on a secured loan like a home equity loan.
- Loan terms may not benefit you: Personal loans typically must be paid back over one to seven years. This is shorter than some options, meaning your monthly payment could be higher. However, this also may be a longer period of time than making the payment on your current credit card, meaning you’ll pay more interest over time.
Fixing your credit card debts Peer-to-peer lending
How it works
Peer-to-peer lending is done through websites that match people looking for small, unsecured loans with investors wanting a return on investment. Like a personal loan from a bank, these peer-to-peer loans tend to be fixed-rate, though they are often shorter-term and smaller.
Who it’s good for
Peer-to-peer loans can be a good option for tech-savvy people who need a small loan they can repay quickly.
Pros of peer-to-peer loans for debt consolidation
- Interest rates are lower than credit cards. Much like a personal loan, a peer-to-peer loan offers interest rates that are typically lower than that of a credit card — saving you money when you consolidate credit card debt.
- Easy online applications. Since these platforms are native to the internet, they feature fast, intuitive applications.
- Fast funding. The largest P2P lending sites advertise that their customers get their loan proceeds in just a few days.
Cons of peer-to-peer loans for debt consolidation
- Significant fees. Peer-to-peer loans come with origination fees that reduce the amount you’re able to use for consolidating debt.
- Good credit required. You will likely need a credit score of around 640 or higher to qualify for a peer-to-peer loan.
Credit counseling
How it works
Credit counseling is done by certified professionals trained in helping you understand your financial situation. Your counselor will be able to help you put together a strategy for reducing your money troubles.
Who it’s good for
Credit counseling can be a good first step for someone who doesn't feel they have a good handle on their finances and isn’t sure whether consolidating their debt will help them become debt-free.
Pros of credit counseling for debt consolidation
- Low cost. Free and low-cost credit counseling services can be found at some credit unions and nonprofits.
- Can help reduce your monthly payment. Your credit counselor may be able to negotiate with your credit card companies to extend the period of time you have to pay off your debt, reducing your monthly payment.
- No new loans. Credit counselors aren’t banks — they may be able to help you reduce your debt without issuing you a new loan.
Cons of credit counseling for debt consolidation
- May charge fees. Credit counseling organizations are often nonprofits, but may still charge set-up or monthly fees to assist you.
Will not reduce the amount you owe. While you may get a lower monthly payment, a credit counseling agency will generally not be able to reduce the total amount you owe.
