How to consolidate credit card debt without hurting your credit

Paying down credit card debt can feel like a financial prison, with high interest rates and monthly payments that barely make a dent in the principal. 

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One way to break free of the vicious cycle is with debt consolidation. Debt consolidation allows you to roll your existing debts into one single balance, generally at a lower interest rate. In addition to regaining control of your finances, you can save money and simplify repayment. 

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However, not all debt consolidation methods are created equally—some can temporarily lower your credit score, while others can completely wreck your report for years. What makes sense for you will ultimately depend on your debt monster and personal situation. This post will explore various consolidation options and how they impact your credit. 

How to consolidate credit card debt without hurting your credit score

It can be challenging to find debt relief without seeing some impact on your credit score. However, it’s not impossible—some options don’t require hard credit pulls or new loan applications. 

401(k) loan

If you have a retirement account, you may be able to leverage your nest egg to consolidate your debt. 

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A 401(k) loan allows you to borrow money from yourself, typically up to 50% of your vested account balance or $50,000, whichever is less. You'll have to repay the loan within five years, usually through payroll deductions. 

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Because you're borrowing from yourself, 401(k) loans are not dependent on your creditworthiness—there's no income requirement, credit score requirement, or underwriting process. You simply need an eligible plan to qualify.

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It’s important to consider that tapping into your retirement savings early can result in a retirement shortfall. It’s always best to consult with a trusted financial advisor before moving forward. 

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How it impacts your credit score: Unlike traditional loans, a 401(k) loan does not impact your credit score. 

Balance transfer

A balance transfer involves moving your existing high-interest credit card balances to a new credit card with a lower interest rate. Balance transfer cards often offer a 0% introductory APR for a set period, typically 12 to 18 months. 

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If you apply for a new card, you'll see a temporary drop in your credit score due to a hard inquiry on your report. However, you don't necessarily need a new credit card to initiate a balance transfer. If you have available credit on an existing card, you can check with your provider for a promotional offer. Companies often offer promotional 0% APR periods and may even offer a lower fixed interest rate at the end of the term. 

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How it impacts your credit score: Using an existing credit card for a balance transfer will not harm your credit score. 

Debt consolidation options that won’t completely crush your credit score

If you have a significant amount of debt or don’t have the assets mentioned above, you can still find debt relief with little impact on your credit score. Although the following options can cause a temporary drop, it’s likely that your financial health will be stronger in the long run. 

Debt consolidation loans

Personal loans are one of the most common debt consolidation products on the market. You borrow a lump sum from a lender to pay off your existing cards. Then, you repay the loan via fixed monthly payments—typically at a rate more reasonable than credit cards. 

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Loan amounts and interest rates are based on a borrower's creditworthiness. However, many lenders are willing to offer loans for low-credit individuals. By shopping around and comparing loan providers, you can find an option best tailored to your needs. 

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How it impacts your credit score: You’ll experience a hard pull, temporarily dropping your score. 

Home equity loans/HELOCs

If you’re a homeowner with equity in your home, you can leverage that wealth to consolidate your credit card debt. HELOCs and home equity loans—two of the most popular products—require a good credit score, a maximum debt-to-income ratio of 43%, and sufficient income and equity to qualify. Rates are generally better than other consumer debt products like credit cards and personal loans. 

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A home equity loan gives you a lump sum, which you repay via fixed monthly payments over a 5-to-30-year term. A home equity line of credit provides a revolving credit line you can draw from when needed. You'll only be responsible for interest payments during the draw period. Once the repayment period begins, you'll be on the hook for monthly payments with a variable interest rate. 

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How it impacts your credit score: Home equity loans and lines of credit result in hard inquiries, which can negatively impact your credit score in the short term.  

Home equity investments 

If your credit score is low or you'd like a financing option without income verification, a home equity investment (HEI) is worth exploring.

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An HEI provides a single lump sum payout in exchange for a share of your home's future appreciation. There are no monthly payments over a flexible 30-year term. You can buy back your equity anytime or at the end of the term when you refinance, sell the home, or use some other cash reserve.

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To qualify, you'll need sufficient equity, a credit score above 500, and a home in an eligible area. 

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How it impacts your credit score: An HEI requires a hard pull on your credit report, which can lower your score in the short term. However, you can prequalify to get an estimate of your offer without impacting your credit score.

Refinance

Another way to leverage your home equity is with a cash-out refinance. Refinancing replaces your existing mortgage with a larger loan, allowing you to pocket the cash difference. A refinance only makes sense if you can secure a better rate or terms. Otherwise, you may end up with a higher monthly mortgage payment or paying thousands more in interest. 

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How it impacts your credit score: Refinancing involves a hard inquiry on your credit report, temporarily lowering your score.

Debt management plan 

If you have the income to tackle your financial obligations—but need a little support—consider a debt management plan (DMP). A non-profit credit counseling agency will work with your creditors to negotiate lower interest rates and create a manageable repayment plan based on your situation. 

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You make a single monthly payment to the agency, which then distributes the payments to your creditors. As a result, you can enjoy simplified repayment and a lower interest rate. 

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How it impacts your credit score: Debt management plans may require you to close any credit card accounts under the plan, which can lower your credit score initially due to reduced credit utilization and age of accounts. 

Options that can significantly impact your credit score

When overwhelmed by credit card debt and faced with limited options, exploring all alternatives is essential. While some solutions can do more harm to your credit score than desirable, finding debt relief may make them worth the consideration. 

Debt settlement 

Debt settlement helps you pay off your debt for less than the full amount owed. You can take the reigns and negotiate with creditors directly or leverage a settlement company to do so on your behalf. 

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You generally have to stop making payments until an agreement is reached, at which point you'll be on the hook for a single lump sum repayment. 

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How it impacts your credit score: Stopping payments to creditors will worsen your score. Additionally, your credit report will indicate that your accounts were settled for less, which can be a red flag for future lenders.

Bankruptcy

If you need a major debt overhaul, bankruptcy can provide a fresh financial start. Bankruptcy is the legal process of eliminating or repaying your debts with protection from the court. Filing Chapter 7 involves liquidating assets to pay off creditors, while Chapter 13 involves creating a 3-to 5-year repayment plan. Because bankruptcy can impact many facets of life, connecting with a financial advisor is highly recommended.

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How it impacts your credit score: Bankruptcy wreaks havoc on a credit score, potentially dropping it by a whopping 200 points. It also remains on your credit report for up to 10 years, making future financing or even getting favorable insurance rates challenging.

Tips for successful debt consolidation

Consolidating credit card debt can be an effective way to reduce interest payments and improve your financial health. However, you can easily fall back into the debt cycle if you don't improve how you manage your money. To ensure long-term success:

• Develop a budget: Create a realistic budget that helps you live within your means to pay down balances faster and avoid new debt. 
• Build an emergency fund: Although saving money while paying off debt may seem counterintuitive, it's essential for safeguarding your finances. By allocating a small portion of your monthly cash flow to an emergency fund, you can avoid relying on credit cards when unexpected expenses arise. 
• Stay disciplined: Consistently make on-time payments to avoid penalties and improve your credit score.
• Resist new debt: Avoid debt after consolidation—consider freezing or closing accounts. 

Final thoughts

Debt consolidation can be a double-edged sword. On the one hand, you can enjoy simplified repayment and even pay less interest on what you owe. On the other hand, your credit score can drop, and you become vulnerable to new debt if you're not responsible. 

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However, you can break the debt cycle by weighing your options, creating a budget, and staying disciplined. Compare your options to find the best rates and terms available to you. 

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If you’re a homeowner who’s worked hard to build up the equity in your home, consider letting your home’s wealth work for you. With a Home Equity Investment from Point, you can pay down your debts and never have to worry about monthly payments. Visit point.com/hei to learn more.