Home Budgeting What Is the Best Way to Consolidate Credit Card Debt?
credit cards in pocket

What Is the Best Way to Consolidate Credit Card Debt?

by Davis Porter

If there’s one thing the average American consumer cannot possibly live without, it’s the credit card. 

Ok, scratch that. I guess the plural form, “credit cards”, would be more accurate- because, get this – the average consumer doesn’t use just one or two cards. Each individual is now switching between four different cards, which happen to offer a cumulative limit of $31,015!

In total, Americans currently have about 511.4 million credit cards in circulation, whose combined balance adds up to over $893 billion

Understanding Credit Card Debt

But, here’s the thing. While you may enjoy the benefits that accompany these cards, the subsequent debt repayment process is no walk in the park. 

As of May 2020, the average credit card interest rate in the US was at 14.52%. Holders with assessed interest accounts, on the other hand, are now paying about 15.78%. Now, imagine all these charges spread out across four cards. 

That should explain why in the first quarter of 2020, 9.1% of all credit card balances in the US were already three or more months delinquent. And the trend has not slowed down since. Many Americans are now increasingly finding it difficult to keep up with debt repayments across all their credit cards. 

Thankfully, there are several methods you could use to consolidate credit card debt. Here’s a brief breakdown of what the process entails, followed by insights into the 3 best ways to consolidate credit card debt. 

What Is Credit Card Debt Consolidation? 

Credit card debt consolidation involves combining balances from multiple credit cards into one collectively streamlined monthly payment. 

And why is this important? 

Well, for starters, it makes it easier to organize and manage your credit card payments. Consolidating your credit card debt allows you to pay off all your balances simultaneously and in time. What’s more, it attracts lower interest rates, which could add up to huge savings over the long haul. 

Consolidating your credit card debt could also help you catch up on delinquent accounts. You can quickly pay off all your late bills and, subsequently, salvage your credit status. 

With that said, it’s worth noting that there are different approaches you could probably use to do this. 

It’s possible, for instance, to consolidate credit card debt through debt management plans, debt settlement services, debt consolidation loans, or balance transfer credit cards. The choice is yours.

Overall, the best method to consolidate credit card debt in your case depends on not only your debt balance, but also your corresponding debt management plan, savings accounts, investment assets, financial history, and credit score. 

Now, to help you get started, we took all these factors into consideration and came up with the 3 best ways to consolidate high-interest credit card debt. They include (in no particular order): 

  • Person Consolidation Loans
  • 401(k) Account Loans
  • Balance Transfer Cards

Top 3 Best Ways To Consolidate Credit Card Debt

Pay Off With Personal Consolidation Loan

Personal consolidation loans offer one of the quickest of most convenient ways to consolidate credit card debt. As long as you have a solid credit score, you could shop around for various options from multiple providers. 

Such debt consolidation loans are available from many financial institutions, including local banks and credit unions. You could even sample loan products from online lenders, and then compare them based on their interest rates, loan terms, plus additional fees and penalties. 

While you’re at it, you’ll be pleased that most lenders are capable of providing rates (and prequalifying your application) without compromising your credit profile with hard inquiries. This is one privilege you don’t usually get from standard bank loans. 

On a sad note, though, you might end up paying an extra one-off origination charge of 1%-8% of the personal consolidation loan amount. Lenders usually add this to the loan’s annual percentage rate to cover their underwriting costs. 

Borrow Against Your 401(k) Savings

If you’re lucky enough to have an employer-sponsored retirement savings plan such as a 403(b) or 401(k), you could easily use it to consolidate credit card debt. The trick is to borrow a loan against your account savings, and then use the funds to offset the high-interest credit card debt. 

Normally, you’re allowed to apply for a loan of up to $50,000, or half of your 401(k) vested account balance – whichever is less. The funds are then released at lower interest rates than unsecured personal consolidation loans. 

But then here’s the kicker – apparently, you need to keep your job throughout the repayment period, as any repayment delays could attract huge levies and tax penalties. 

Move The Debt Amounts To Balance Transfer Card

You could use a new credit card to consolidate your old credit card debt. This particular caliber is known as the Balance Transfer Card, and it’s intended to do just that. 

It gives you the privilege of transferring balances from other credit cards, after which it proceeds to host the amounts at lower interest rates. 

In fact, some balance transfer cards charge as low as zero-interest for the first 12-18 months. You’ll find these introductory offers in cards from both commercial banks and online lenders. 

To qualify for one, however, you’ll need a pretty solid credit score – at least 690 for a start. And if your application happens to sail through, the low promotional rates should give you about a year or so to breathe and repay your debt in peace.  

The credit transfer process, on the other hand, will cost you about 3%-5% of the balance, which is fairly negligible compared to the 14%-15% interest rate on credit card debt. 

Now, once the transfer process is complete, you’ll want to pay off your credit card debt before the promotional period lapses. Otherwise, the balance transfer card’s rates could skyrocket significantly. 

The Bottom Line

By now, you should have noticed the predominant principle when it comes to consolidating credit card debt. All the methods we’ve mentioned so far manage to consolidate credit card debt by paying off the balances with low-interest interest funds. 

And that’s pretty much all it takes. Simply find yourself a lender that offers cheaper rates than your card issuer, and then borrow funds to offset the debt. That should buy you some valuable time to reorganize your finances and settle all the debts.

Related Posts

Leave a Comment