4 Strategies to Consolidate and Pay off Your Credit Card Debt Faster

A young woman cuts up multiple credit cards showing credit card debt, consolidation and bankruptcy
Aileen Perilla/The Penny Hoarder

So you’re falling behind on your credit card payments. Hey, it happens to the best of us. We’ve all been there.

First you were just a little behind. But now you’re paying so much in interest to Chase or Citibank or Capital One every month, you can’t afford to pay off the principal you owe. You’re just treading water financially, and you’ll never get free that way.

What are you going to do about it?

If you have a lot of credit card debt, seriously look into consolidating it. That’s when you borrow money at a low interest rate and use that loan to pay off the balances from your high-interest credit cards.

It’s a twofer: You can save a ton of money on interest payments, freeing up cash to pay down your debt faster.

We’re going to look at four different ways to consolidate your credit card debt, along with our best tips for each one.

But first, there are two important steps you’ll need to take if you really want this plan to do what it’s supposed to do.

2 Key Steps to Making Debt Consolidation Work

Debt consolidation isn’t for everyone. It’s not a magic wand, it’s actually a years-long process that requires discipline. Here’s how to make sure it’ll work for you.

1. Stop Using Your Credit Cards

First, make a budget you can actually stick to. Spend a few weeks tracking what you really spend. What seem like small costs — going out for lunch or coffee every day — may add up over time.

Here’s a good Penny Hoarder strategy for budgeting: Streamline to one main payment method — paying with all cash or with one debit card, for example — to make it easier to to track your expenses.

Cut up your credit cards or lock them away. Put yourself on a spending diet. If you can’t pay cash for it, you don’t need it.

Just don’t close all your credit card accounts, which could hurt your credit score. That’s because it affects your credit utilization rate, which represents how much of your available credit you’re actually using. When that utilization rate goes up, credit-scoring agencies see it as a sign of risk.

2. Figure out How Long You’ll Need to Pay off Your Debt

This is important: To successfully pull this off, you should be able to pay your debt in two to five years, the typical length of a debt consolidation loan.

To determine whether you can do that, figure out what you owe. Sign up with a free service like Credit Sesame. It’ll show your balance on any unpaid bills, credit cards or loans.

Once you decide you’re ready to proceed, look into consolidation.

4 Ways to Consolidate Your Credit Card Debt

You have a few options to consider here. Keep in mind what your ultimate goal is: To borrow money at a low interest rate so you can kill off high-interest debt.

Let’s take a look at four different ways you could do that:

1. Get a Personal Loan

Personal loans tend to have lower interest rates than credit cards. Just make sure you’ll be able to repay the lender a fixed amount every month for a set time period — usually two to five years.

Shopping around for a loan sounds like it might be a pain, but it doesn’t have to be. Instead of spending hours scouring the internet, you can go window-shopping at an online marketplace that’ll help pinpoint the best loan for you.

Here are some of the best places we know to find a credit card debt consolidation loan:

Credible: Compare Rates Side by Side

At Credible, you can compare rates side by side from multiple lenders who are competing against each other for your business.

You can borrow $1,000 to $50,000 with a loan term of two to five years, at interest rates ranging from 4.99% to 35.99%. The interest rates you’re offered will depend on your individual credit profile. Credible is best for borrowers who have good credit scores and just want to simplify their debt.

Fiona: Borrow More Money

Compared to Credible, Fiona allows you to borrow more money and borrow it for a longer period of time — if that’s what you want to do.

You can borrow up to $100,000 and spend up to seven years paying it back. You’ll need a credit score of at least 620. Interest rates range from 4.99% to 35.99%.

Upstart: Good for a Short Credit History

Founded by ex-Googlers, Upstart is a lending company that’s striving to change the personal loan game. Rather than solely focusing on your credit score to determine your borrowing power, it looks at other factors, too, including your education and employment history (though it does require a 620 credit score).

Upstart tends to be especially helpful for recent grads, who have a short credit history and a mound of student debt.

2. Use a Balance Transfer Card

If your credit is good, you could apply for a zero- or low-interest credit card, then transfer the balance from your high-interest cards.

To entice you, many credit cards offer a 0% interest rate on balance transfers for a year or 18 months.

Of course, that’s not as long as the two- to five-year time frame that a personal loan will give you to pay back the money you owe.

The pro: If you transfer a credit card balance and repay it during your new card’s 12- to 18-month promotional period, you’ll pay no interest. SCORE!

The con: After that sweet, sweet promotional period ends, a high interest rate usually kicks in. If you don’t have your balance paid off by then, you’re back to paying high interest all over again.

Also, many cards will charge you a balance transfer fee — usually something like $5 or 3% of the balance you’re transferring.

3. Borrow or Withdraw From Your Retirement Plan

Here’s an interesting reality check: Virtually any financial adviser you talk to will tell you this is a bad idea because it’ll impact your retirement savings.

But one out of every four American households ends up doing withdrawing or borrowing from a 401(k) at least once, according to the financial website HelloWallet, so clearly a lot of people feel it’s a valid option.

Let’s go over the basics of a 401(k) loan here:

  • You can borrow as much as half the balance of your employer-sponsored 401(k), up to $50,000, without penalty.
  • You can only withdraw money you contributed to the plan, you can’t withdraw your employer’s match.
  • You typically have to repay the loan within five years.
  • If you leave your job, you’ll have to pay back the loan within 60 days or take the amount as a heavily taxed distribution.

The pro: A loan from your 401(k) won’t be taxed if you repay the money within the term.

The con: For a withdrawal you don’t plan to repay, you immediately get slammed with a 10% tax penalty, and you’ll have to pay taxes on it next April.

4. Borrow Against the Value of Your Home

If you own a home, you could also consider getting a home equity loan or line of credit.

These typically offer way lower interest rates than credit cards. That’s because you’re borrowing against your equity.

What’s equity? Every time you make a mortgage payment, and every time your home’s market value goes up, you’re building equity. So if you’ve owned your home for a while, you probably have equity you can tap into.

So what’s the difference between a home equity loan and a home equity line of credit?

  • With a home equity loan, you’re borrowing a fixed amount of money, which you receive in a lump sum. You pay it back at a fixed interest rate over a set period of time, like three or five years.
  • In contrast, a home equity line of credit offers you more flexibility. It allows you to just borrow money whenever you need it, using your home as collateral. The interest rate you’re paying on the money you borrowed may go up or down, depending on how financial markets are doing.

The pro: The interest rate will almost certainly be lower than what your credit cards are charging you. So you can save money on interest.

The con: You’re putting your house at risk if you default on the loan.

If You Can’t Afford to Pay the Debt

If it turns out that you really can’t repay your debts, consider bankruptcy as a last resort. Here’s the skinny on filing for bankruptcy and how it affects your life.

That shouldn’t be your first choice, though. Bankruptcy will be a black mark on your credit history — one that lasts up to 10 years.

Here’s the bottom line: If you’re deep in credit card card, consolidating is a smart, strategic way to lower interest rates and pay it down faster.

Mike Brassfield ([email protected]) is a senior writer at The Penny Hoarder. He knows a lot about massive debt, based on his personal experience with it.

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This article contains general information and explains options you may have, but it is not intended to be investment advice or a personal recommendation. We can't personalize articles for our readers, so your situation may vary from the one discussed here. Please seek a licensed professional for tax advice, legal advice, financial planning advice or investment advice.