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How to Consolidate Debt at a Lower Rate

Reading time: 5 Minutes

May 11th, 2019

According to the U.S. Federal Reserve, if you have credit card debt, you’re not alone. Almost 50 percent of U.S. households don’t pay off their credit card balance every month, and in Hawaii it’s no different.

A Hawaii News Now article reported that, “While Hawaii has the 10th-highest median wage nationwide, that’s not enough to make up for living expenses that are two-thirds higher than in the rest of the nation.”

To bridge the gap between income and expenses, an average family might rely on credit cards, at least occasionally. The good news is that, if your family is among that category and you’re feeling stuck, there may be consolidation loans and other credit card consolidation strategies that can help you find a way out.

Start by getting organized

“Like with any good strategy, you need to start with a plan,” says Taylor Kirihara, senior vice president and Downtown market manager at Bank of Hawaii. “This means knowing what your current debt situation is by writing everything down: amounts owed, interest rates, minimum payments and terms of the loans.”

  1. Prioritize high interest debts first.

Paying off a smaller debt before moving to bigger amounts may be tempting, but that’s the wrong approach, cautions Kirihara. Instead, prioritize by focusing on debt with the highest interest rate first.

  1. Create a budget to cover minimum payments.

After you’ve prioritized your focus areas, establish a budget to cover all minimum payments on your debt, Kirihara explains, otherwise, “you might incur a multitude of fees and negatively impact your credit score.”

  1. Make extra payments starting with high priority debts if you can.

Once you’ve established your budget, put any funds you can spare towards an additional monthly payment on your highest interest rate debt. This should allow you to pay off your debt faster and save money in the long run.

Paying off debt takes time and concerted effort. The question is, how to get out of debt if you’re on a tight budget and depend on credit cards occasionally to make ends meet.

Let’s look at some options at your disposal.

Transfer your balance to a card with a low Annual Percentage Rate (APR)

The process of transferring your balance to a card with a low APR is fairly simple. Shop for a low-interest credit card to pay off a balance you have on a high-interest card. To do so, compare your current APR with the rates of prospective new credit cards. You may be surprised by the savings this step alone can earn you.

NOTE: Take into account that in some cases, you will be charged a two percent to five percent balance transfer fee. This fee will be added to the amount you currently owe.

Transfer your balance to a card with an introductory 0% APR

Another way out might be applying for a credit card with a zero percent introductory APR. These intro rates generally last from six months to 21 months, which may be enough for you to pay off your high-interest debt or at least the bulk of it.

While switching credit cards can be an opportunity for getting rid of your high-interest burden, be aware of some important points when you’re shopping around:

  • Make sure you are getting zero percent APR on balance transfers, and not just purchases.
  • Factor in any balance transfer fees, or better yet, look for cards with no balance transfer fees.
  • Create a payment plan to pay off your debt before the regular APR kicks in.
  • Be disciplined and stick to your plan to pay off your debt.

With these points in mind, be extra vigilant and methodical, or you could end up worse off than when you started.

“Be careful when using balance transfers as a lending strategy,” says Kirihara. “If you are not diligent at paying these credit cards back, you run the risk of 'snowballing' your outstanding credit card debt, and once the balance transfer promotion expires, you’ll be stuck paying high interest rates on potentially a larger than expected balance.”

Consolidate debt with a cash-out refinance

If you’re a homeowner with some equity built up in your home, refinancing your mortgage might be a way to vastly reduce or eliminate your credit card debt altogether. Because a mortgage is a secured loan, the interest rate will be much lower than the one you’re likely paying on your credit cards, and you may be able to deduct interest payments from your taxes. Consult your tax advisor to be sure.

Here’s how it works: a cash-out refinance may let you get a new mortgage for more than your current mortgage balance. You pay off your existing mortgage with a new, larger mortgage, and then have access to the additional money to use for paying down other debts.

For example, you might still owe $100,000 on your mortgage, but you refinance for $200,000, using the built-up equity in your home as collateral. You can only do this if your loan amount is within the loan to value guidelines set by your lender, so you will not be able to borrow more than your home is worth.

Consolidate debt with a home equity line of credit (HELOC)

Another option, if you are a home owner, is to apply for a home equity line of credit in order to pay off your credit card debt. HELOC interest rates are generally significantly lower than most credit card rates.

However, there are three unique risks of consolidating your debts with HELOC you should consider:

  • Your house is the collateral. If you find yourself unable to pay, you could face foreclosure.
  • If your home value depreciates, you might end up owing more than it’s worth.
  • You may have to pay closing costs.

Concerns involved when your home is being used as collateral can be overwhelming, especially when paired with the inherent burden and worries of having debt. Ask your banker or financial advisor to weigh the risks and benefits with you. Then choose your path to paying off debt-and stick to it. And, no matter what debt consolidation strategy you choose, adopt healthy spending habits that position you to achieve debt-free financial success.


Applications for credit will impact your credit score. You should consult your financial advisor before applying for multiple credit products.

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