Credit card debt is personal. No matter why you have it, it tends to weigh on you like a dark secret. It can be exhausting, stifling, even isolating.
But the reality is that plenty of people are in the same boat: Forty-seven percent of Americans who use credit cards carry a balance, and less than half of those people have a plan to pay it down, according to Bankrate’s latest annual survey of U.S. adults. Worse, more than one in five of them thinks they’ll never be rid of credit card debt.
This is when some kind of debt consolidation may offer a path forward. Whether it’s through a home equity loan, a personal loan, or some other type of refinancing, consolidation can help neutralize the very features that make credit card debt such a slippery slope: high interest rates (averaging over 22% as of November,) compounding interest charges, and the open-ended nature of revolving credit.
It’s worth exploring when there’s so much at stake: When your debt is a moving target, it’s more likely to become a trap. It can lower your quality of life, and get in the way of milestones like buying a house, having kids, or retiring.
Here’s more on how it works and what to consider.
Why Debt Consolidation?
Consolidating your debt is a form of refinancing that involves combining your existing debts into a single new loan or credit line. Besides credit card balances, these might include medical debt or payday loans. You can even refinance federal and private student loans, though not usually with other types of loans.
The goal of debt consolidation is to save money and/or make your bills more manageable, so it should offer one or more of the following advantages, and ideally all three:
• A lower interest rate and lower total interest costs over time
• One monthly due date and an end date for conquering your debt
• A lower monthly expense that creates wiggle room in your budget
You usually don’t want to consolidate if it would extend your repayment timeline or increase your costs. However, if your main motivation is to lower your monthly overhead, consolidation could still be worthwhile — at least temporarily. Once you’re able to pay more, you can look to refinance again with terms that will save you money.
Consolidation Options: Which One Is Best When?
Personal loans
Credit card debt can feel like a never-ending treadmill. And sometimes a big milestone or unexpected expense makes you realize it’s time to address your debt head-on, whether you owe $5,000 or $50,000. Personal loans could be a good way to do that if you want a quick, low-maintenance loan process and don’t own a home (more on that in a moment.)
Term: Generally 2 to 7 years
Borrowing limit: Varies, but some lenders offer up to $100,000
Interest rate: Typically fixed. Can be about half the rate of a credit card, though it depends on creditworthiness and other factors. (Check your rate with SoFi here, or run your numbers through this debt consolidation calculator.)
Home equity loans
If you do own a home and competing financial priorities are making it hard for your household to keep up, leaning on this valuable asset could help you regain control of your finances.
Term: Generally 5 to 30 years
Borrowing limit: Often up to 80% (even 85%) of the equity in your home
Interest rate: Fixed. Typically lower than both a personal loan or credit card rate, though it depends on creditworthiness and other factors. (Check your rate with SoFi here.)
This head-to-head can help you decide which works best for your needs:
| Personal Loan | Home Equity Loan |
|---|---|
|
➕ Quicker application process ➕ Good option for renters ➖ Getting a lower rate than you already have can depend heavily on your credit record ➖ Potential for up-front origination fees |
➕ Tend to have lower interest rates ➕ Higher amounts and longer repayment terms ➖ Risk of foreclosure if you default ➖ Closing costs and more paperwork |
Note: You can also use a home equity line of credit (HELOC) to consolidate debt. The main difference is that a HELOC is revolving credit so the interest rate will be variable rather than fixed and the repayment schedule isn’t as clear cut.
0% APR balance transfer credit cards
If you’re getting frustrated that your balance doesn’t seem to shrink, transferring it to a credit card offering a temporary reprieve on interest charges can give you some breathing room. With a year or 18 months with a 0% annual percentage rate (APR), every dollar you pay will reduce your principal balance so you can make more progress. (In some cases, the 0% APR may apply to new purchases as well.) The tradeoff is there is usually a balance transfer fee, so you’ll want to make sure the interest you’ll save is more than that cost.
Term: Typically between 12 and 21 months
Borrowing limit: Usually up to your available credit limit
Interest rate: 0% initially, then it goes back to a typical credit card rate
➕ Quick application process
➖ Balance transfer fee (usually 3%-5% of the amount transferred)
➖ Short period to pay off debt
➖ Strong credit may be required, according to Nerdwallet.
Student loan refinancing
Student loan debt can be another major barrier to financial goals, and depending on the interest rate you’re paying, refinancing might save you thousands in interest and enable you to pay off your debt sooner.
But consolidating student loans works differently than consolidating credit card debt. First, you can’t usually mix student debt with other debt. And second, the only way to actually change the interest rate is to refinance with a private lender.
While there is consolidation available through the federal student loan system, you’re automatically given the weighted average of the interest rates on your existing loans, so it isn’t a money-saving move, per se.
That’s why you’ll need to look at private loan refinancing to potentially lower your interest rate. There is an important downside to consider, however: Refinancing out of the federal loan system means you’ll lose the right to access federal benefits. This includes any federally authorized forbearance periods (as we saw during COVID), subsidies, or loan forgiveness options.
Term: Often 5 to 20 years
Borrowing limit: Varies
Interest rate: Either fixed or variable, and depends on creditworthiness and other factors. (Check your rate with SoFi and run your numbers through this calculator to see if you’d save money by refinancing.)
➕ Could potentially lower your monthly bill and overall interest paid
➖ Loss of federal benefits
➖ You may not qualify without a strong credit record or co-signer
To Make the Most of a Debt Consolidation
You’ll want to consider these four important factors before consolidating your debt:
• Fees. If you’re paying fees to consolidate your debt, it can eat into the interest you’ll save. Reputable lenders are upfront about these costs, but if you’re unclear about any terms, reach out to customer service before you borrow.
• Interest trade-offs. You may need a loan with a longer repayment timeline to lower your monthly debt expense. And that is a legitimate objective if you’re struggling to make ends meet. But if you’re signing up to pay more interest over the life of the loan, making additional payments once you’re back on track financially can help you reduce your interest costs and reach the finish line faster.
• Your budget. It feels good to see all of those zero balances on your accounts, but that feeling will evaporate quickly if you start carrying balances again. If your original debt stemmed from overspending, explore ways to reset your budget so you can build on your hard-earned progress.
• Your credit record. Lower credit scores can make it harder to get the interest rate you’d need to make a debt consolidation worthwhile. It may even make it difficult to get approved. But there are ways to improve your credit score. You can also consider bringing on a co-signer to strengthen your application.
An Example of Debt Consolidation
What does this look like in practice? Let’s say you’re currently making $800 in monthly payments on $30,000 in credit card balances charging an APR of 24%. If you were to qualify for a personal debt consolidation loan with an APR of 13%, here’s how your payoff could compare:
| Existing debt | Consolidation loan | |
|---|---|---|
| APR | 24% | 13% |
| Monthly pay | $800.00 | $682.59 |
| Time to payoff | 5 years and 11 months | 5 years |
| Total payments | $56,004.51 | $40,955.53 |
| Total interest | $26,004.53 | $10,955.53 |
Of course, every situation is unique, and this is a hypothetical scenario for illustrative purposes only. (It’s doubtful that you’d be paying the same APR on all your balances, for one thing.) But based on the math above, the consolidated loan lowers your monthly payment by over $100, saves over $15,000 in interest, gets you to zero debt 11 months faster.
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