If your credit card debt feels out of control, you’re not alone. With headline-making inflation and higher prices on everyday essentials, more people are using their credit cards. Experian, one of the major credit bureaus, reported that the average credit card balance was nearly $5,589 at the end of 2021, up from a low of $5,007 earlier in the year.
It’s easy for your credit-card debt to rapidly balloon, especially now that interest rates are rising. According to the Federal Reserve, the average annual percentage rate, or APR, for credit cards that assessed interest recently eclipsed 16%. If you had that balance and APR and only made the minimum monthly payments, it would take you five years to get out of debt. Worse, you’d pay nearly $7,800. Interest charges would add over $2,500 to your repayment cost.
If your goal is to lessen or eliminate your credit-card debt, there are ways to save money and pay off your cards faster. Continue reading to learn how as well as the pros and cons of five common debt consolidation methods and where to go for help managing your debt.
1. Opt for a 0% APR balance transfer credit card
Who it’s best for: Borrowers with excellent credit who can pay off their balance in six to 18 months
If you have a balance on your cards, a popular credit card debt consolidation strategy is to apply for a balance transfer credit card. This approach involves transferring your high-interest debt to a new credit card that offers a lower introductory APR for a limited time. By transferring your balance, you could save money on interest charges.
- No interest accrues during the promotional period
- Quick and easy application process
During the promotional period—which can last between six and 18 months—your card will have a lower APR. Many cards offer 0% APR during the introductory period, so you’ll have several months to pay off the balance without interest accruing.
With a balance transfer card, you can apply online and receive a decision within minutes. You have to contact the new card issuer to transfer your balance, but the process typically takes just a few days to complete.
- Balance transfer fees apply
- Regular APR applies once the promotional offer ends
- Good to excellent credit is required
Transferring your balance isn’t free. Most credit cards charge balance transfer fees when you move a balance over to a new card. These fees are usually 3% to 5% of the transferred amount, and the card issuer adds the fee to your balance. For example, if you transferred over $5,589—the average credit card balance—to a new card, you’d have to pay between $157 and $261 in balance transfer fees.
What’s more, balance transfer cards’ lower APRs only last for a promotional period. Once the introductory offer ends, the regular APR applies to your balance. Because the regular APR can be high—some cards have regular APRs over 30%— balance transfers tend only to make sense if you can pay off the balance before the promotional period ends.
In addition, to qualify for a balance transfer credit card with 0% APR, you typically need good to excellent credit. According to Equifax, that means you’ll need a score of 670 or higher.
“You will want to be sure that you will qualify for the promotional rate for the balance transfer,” cautions Lawrence Sprung, a certified financial planner in Hauppage, N.Y. “Based on your credit, income and outstanding debt, you could go through the whole process and end up with a promotional rate higher than you expected.”
Your credit score may be low if you’ve racked up credit card debt and are generally struggling to manage your payments. Applying for a card and undergoing a hard credit inquiry could damage your credit even more, and you may not be eligible for the low APR offers.
2. Get a credit card debt consolidation loan
Who it’s best for: Borrowers with good to excellent credit that need more time to pay off their debt
If you’re researching how to pay off credit card debt fast, another option is to apply for a debt consolidation loan. Debt consolidation loans are a form of personal loan for credit card debt; you take out a loan for the amount of your existing debt and use it to pay off your cards. Katie Bossler, a quality assurance specialist with GreenPath Financial Wellness, a nonprofit debt counseling agency, says debt consolidation loans can be a good option for people with higher debt levels.
“You may be able to get a larger amount of your total debt” on a debt consolidation loan, she says. “That’s often a roadblock with balance transfers because you may not be able to transfer all of your debt onto one card.”
- Longer repayment terms available
- Lower interest rates than credit cards
Generally, debt consolidation loans have repayment terms ranging from two to seven years. You can choose a loan term that fits your budget and financial goals.
Personal loans also usually have lower APRs than credit cards, and they usually have fixed interest rates. The Federal Reserve reported that the average APR for a personal loan with a 24-month term was just 8.6% as of May 2022—significantly lower than the average APR on credit cards. If you qualify for a loan with a lower rate, you could save a substantial amount of money.
- Good to excellent credit is required
- Origination fees may apply
- Frees up credit limits
Like balance transfer cards, debt consolidation loans usually require applicants to have good to excellent credit to qualify for a loan.
Todd Christensen, education manager with Debt Reduction Services, a nonprofit debt counseling agency, says there are loans for people with less-than-perfect credit. However, they tend to have higher APRs—some more than 35%—so they may not be a cost-effective way to consolidate your debt.
“You’re asking a single lender to take on all the risks that multiple lenders have had, and you’re having trouble paying your debt, so why would a new lender want to take that risk?” he asks. “Typically, if they do, it will be at a much higher interest rate than you’d get with other lenders.”
Another issue is origination fees. If you have excellent credit, you can usually find a lender that doesn’t charge these. But origination fees are common for those with credit scores under 670. Depending on the lender, the fee can be as high as 8% of the loan amount. On a $5,589 loan, that means you’d have to pay up to $447 in origination fees.
“Some online finance companies charge extraordinarily high origination fees and extravagant interest rates,” cautions Christensen. “If somebody is looking at a personal loan, I recommend starting with your bank or credit union—if you can’t qualify [for a loan] with them, that’s a sign you need to address the causes of your poor credit first.”
If you aren’t aren’t able to stick to a repayment schedule debt consolidation loans can also be risky. When you consolidate your debt with a personal loan, you pay off your credit cards. Once your balance is paid off, you have access to that card’s full credit limit again. Unless you stick to a repayment plan, you could quickly rack up credit card debt on top of the debt consolidation loan. Of course, you can cancel one or several of your credit cards. While that can ding your credit score, it may be worth it by helping you to stay organized and remove temptation.
3. Take a 401(k) loan
Who it’s best for: Borrowers who aren’teligible for low-interest credit cards or loans
If you have a retirement plan through your employer, you can use a 401(k) loan to consolidate your debt. Because there are no credit checks, you can get a loan even if you have less-than-perfect credit, and you can repay yourself over time.
- Low interest rates
- Credit inquiries aren’t required
- High loan maximum
401(k) loans usually have lower interest rates and fees than you’d get with a personal loan—especially if you have poor credit—so you can save money by using a 401(k) loan. Interest rates are set by the plan administrator, but 401(k) loans have rates that are one or two percentage points higher than the current Prime Rate—an index banks use to determine what rates to charge on loans and lines of credit. Interest rates can fluctuate over time as the Prime Rate changes, but you lock in a rate when you take out the loan, and it remains fixed until it’s repaid in full.
You can get a 401(k) loan without undergoing a credit inquiry, so there’s no impact on your credit score. And you can get a loan even if you don’t have good credit.
In addition, depending on your 401(k) balance, you may be eligible for a higher loan amount than you’d get with other loan types. You can generally borrow up to 50% of your 401(k) balance or $50,000, whichever is less.
- Loss of potential growth
- Forced repayment if you leave your job
- Penalties, fees and taxes if you can’t repay
By borrowing from your retirement account, you’re removing money that could have grown if left untouched, says Christensen. That’s lost potential earnings that you’ll never get back, which could hurt you once you reach retirement age.
“If you’re borrowing against your future to fix your present, it’s not the greatest long-term solution,” he says.
If you leave your job and have an outstanding 401(k) loan, you typically have to repay the loan within 90 days of your departure. Otherwise, the loan is considered in default.
And if you don’t repay your loan on time and enter default, the remaining loan balance is considered an early withdrawal and income taxes are due on the full amount. If you’re younger than 59 ½, you will also owe early withdrawal penalties.
4. Consider a home equity loan
Who it’s best for: Homeowners with fair to good credit that need a larger loan amount.
If you own a home and have at least 20% equity in your home, you may be able to consolidate your credit card debt with a home equity loan. Home equity loans typically have lower interest rates than other loans, and they have fixed interest rates that stay the same for the duration of the loan.
In general, lenders allow you to borrow up to 80% of the available equity, but the actual amount you can borrow is dependent on your credit, income and current home value.
For example, if you have a $400,000 home and owe $300,000 on your mortgage, you have $100,000 in equity. Lenders require you to maintain 20% equity in the home. In this case, you’d need to keep $80,000 of equity, so the most you could borrow would be $20,000.
- Lower interest rates than unsecured loans
- Longer repayment terms
- Potentially higher loan amounts available
With a home equity loan, your loan is secured by your house. Because your home serves as the collateral, there is less risk to the lender, so you may get a lower interest rate on a home equity loan than you’d get with a credit card or personal loan. Home equity loans typically have fixed interest rates that stay the same for the duration of the loan.
Repayment terms vary by lender, but can be as long as 20 years. Considering that most personal loans have repayment terms of seven years or less, a home equity loan with a longer term could give you a more affordable monthly payment.
Because you’re borrowing against your home’s equity, you could qualify for a higher loan amount than you could get with other loan types.
- Loan secured by your house
- Closing costs apply
- Loan process can take two to six weeks
Your house is the collateral on a home equity loan. If you miss your loan payments, the lender can begin foreclosure proceedings against you, and you could lose your house. Sprung says keeping the debt on a credit card may be a better choice for some.
“Keeping the debt on the credit card does not put your home in jeopardy, in the same way as having the home equity loan would,” he says.
Similar to mortgages used to purchase homes, home equity loans have closing costs. Closing costs on home equity loans can range from 2% to 5% of the loan amount.
In addition, home equity loans typically take much longer to process than balance transfer cards or debt consolidation loans. It could take up to six weeks to close on a home equity loan, so if you are looking for help with credit card debt, you might want to consider your other options.
5. Enter a debt management plan
Who it’s best for: Borrowers with poor to fair credit that need help managing their debt.
If figuring out how to pay down credit card debt makes you feel overwhelmed, another option is to work with a nonprofit credit counseling agency and enter into a debt management plan, or DMP.
Under a DMP, your outstanding debt is consolidated by a nonprofit credit counseling agency; the agency handles the debt and contacts the creditors to negotiate better terms. You make one payment to the agency, and the agency takes your payment and disburses it to your creditors on your behalf based on the terms they negotiated.
Tip: There are some predatory companies that may promise to help you with their debt but charge exorbitant fees. To find a reputable counseling agency, visit the U.S. Department of Justice’s site and look for an agency that is certified by the National Foundation for Credit Counseling or American Consumer Credit Counseling.
- Addresses the root cause
- May reduce APRs and fees
- Simplifies repayment
The problem with many debt consolidation methods is that they don’t address what caused you to get into debt in the first place. With a DMP, you work with a debt counselor to identify what led you into debt, create a budget and develop a plan forward.
What’s more, when you enter into a DMP, the agency works with your creditors to negotiate lower rates and fees, so it can help you save money and get out of debt faster.
Ultimately, a DMP is a way to consolidate your debt and streamline your payments. You’ll make one monthly payment to the agency, making it easier for you to manage your finances and make your payments on time.
- Startup and monthly fees apply
- Limits use of credit
- Can take up to five years
While DMPs are offered by nonprofit credit counseling agencies, there are fees involved. There is usually an upfront setup fee and an ongoing monthly fee. According to Experian, setup fees are often $30 to $50, and monthly fees are $20 to $75. Fees are capped by state, and low-income consumers—people who are at 150% of the federal poverty guideline—can qualify for waived or reduced fees.
As part of the DMP, you usually agree to certain restrictions on using credit. You may have to stop most of your credit cards and agree not to apply for new lines of credit.
However, Bossler says you shouldn’t let those restrictions prevent you from entering into a DMP.
“We recommend going to a more debit or cash-based system, but we customize plans for the client,” she says. “It’s very common for a client to leave an account out [of the DMP] in case of emergencies or if they need a card for work or travel.”
A DMP is not a quick fix. Depending on your situation, it can take up to five years to get out of debt. Successfully paying off your debt under a DMP, requires that you stick to your plan.
The advice, recommendations or rankings expressed in this article are those of the Buy Side from WSJ editorial team, and have not been reviewed or endorsed by our commercial partners.