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Table of Contents
Debt consolidation loans, credit card balance transfers, and debt relief options are common ways to consolidate credit card debt. Find the method that best fits your credit and financial situation.
What's inside this article
- What is credit card consolidation?
- Credit card consolidation - Getting started
- Credit Card Consolidation Calculator
- 5 Ways to consolidate credit card debt
- Should you consolidate credit card debt?
What is credit card consolidation?
Credit card consolidation is a way to combine some or all of your debt into one payment. A personal loan is the most common form of debt consolidation. You can use a credit card consolidation loan to pay off multiple debts and save money, by reducing your total costs to pay off your debt.
According to the Consumer Finance Protection Bureau (CFPB), "Consolidation means that your various debts, whether they are credit card bills or loan payments, are rolled into one monthly payment. If you have multiple credit card accounts or loans, consolidation may be a way to simplify or lower payments".
Other options for credit card consolidation include a 0% introductory APR balance transfer and HELOC or other home mortgages. If you are struggling with debt then consider debt relief solutions that consolidate your monthly payment, such as a debt management plan or debt settlement program.
Credit card consolidation - Getting started
Credit card consolidation's primary goals are to pay off your debt faster, save money, and maintain affordable monthly payments. Your best credit card consolidation solution depends on your financial details. Choose a solution based on your credit score, cash flow, and assets.
Here are four steps to help you consolidate your credit card debt:
Step 1 - List your balances, interest rates, and monthly payments
Create a list of all of your debts. Include your balance, interest rate, and monthly payments. Check your bank statements, credit card statements, and a credit report to review all of your debts and find the relevant information.
Step 2 - Calculate how much you can afford to pay
Monthly payment affordability is a critical factor in consolidating debt. Can you afford your monthly payments and maybe even make larger ones? Or are you struggling and you can't afford the current minimum monthly payments on your credit card? If you don't have the answers to those questions, then start making a budget.
Step 3 - Check your credit score
Your credit score is crucial to finding a debt consolidation solution. For example, credit card consolidation loan rates are more attractive if you have an excellent credit score. If your credit score is low, then you might need to consider other alternatives. You can find your credit score through a lender or an online service.
Step 4 - List your assets
Although balance transfer and personal loans are generally unsecured debt solutions, some credit card consolidation programs use assets. Do you own a home? If so, do you have sufficient equity? You need to know the current value and the amount of mortgage debt. Other assets to check are savings accounts for secured loans or retirement accounts for a secured consolidation loan.
5 Ways to consolidate credit card debt
Take a personal loan
A common way to consolidate credit card debt is to borrowing money from a bank, credit union, or online lender. The new loan is used to pay off your current credit card debts.
Credit card consolidation loans are a fairly straightforward product. The new loan is used to pay off existing credit card debt. Debt consolidation loans are generally repaid over two to five years, although some lenders offer personal loans up to 7 years. Interest rates vary greatly and can range from about 5.99% APR to 35.99% APR. The most significant factor is your credit score. If you have an excellent credit score you can qualify for the best rates. If your credit score is poor a debt consolidation loan is going to be expensive.
- Convenience - An unsecured credit card consolidation loan can give you the convenience of paying off all your credit card bills in one monthly payment.
- Save money - Depending on your credit card interest rates, you can save money with a lower interest rate.
- Too expensive - For many borrowers, unsecured loans have a high-interest rate and will not save you money.
- Hard to qualify - Strong credit and income are required to get an unsecured personal loan at the best rates.
Use a balance transfer credit card
If you have excellent credit, you can consolidate credit card debt through a balance transfer offer. Today, if you shop around, you can find offers with a 0% introductory interest rate for as long as 21 months with no fees. Consolidate your existing credit card balances to the new account if you can make serious progress on paying off your debt during the low-interest period.
When comparing balance transfer offers from different credit card issuers, debt, pay attention to the following terms, and read the fine print:
- Initial Interest Rate- Lenders lure you into applying for the credit card consolidation through a low introductory rate, which is commonly called the "teaser rate.".
- Initial Rate Period- Some teaser rates are good for six months before a new, higher interest rate kicks in. Other cards offer a teaser period of as long as 18 months.
- Interest Rate Adjustment- Once the teaser rate expires, your rate increases. It is your responsibility to know how high your rate will be, once it adjusts.
- Fees- Standard balance transfer fees are 3% of the balances you transfer
- Interest Rates on Purchases- Your teaser rate may only apply to the balances you transfer. Purchases may be charged at a different, much higher interest rate
- Save money - If you take advantage of the initial rate period, consolidating credit card debt with a balance transfer offers vast savings opportunities.
- Pay off debt quicker - Even if you make the same monthly payments, you will pay off your debt much faster because your money is going directly to the balance.
- Limited Availability - You need excellent credit to qualify for a balance transfer.
- Penalty Rate - If you ever miss a payment, your low-interest rate disappears, replaced by rates as high as 29.99% or above.
- Run up debt - If you make large purchases or don’t aggressively pay down your debt you won't make enough progress during the months of low interest to solve your debt problems.
Take a home equity mortgage
Is your debt consolidation goal lower monthly payments? Do you own a home with equity? If so, then check out a home equity mortgage to consolidate your credit card debt.
A cash-out refinance mortgage, a or (HELOC) is a credit card debt consolidation options worth checking out.
There are several types of home equity mortgages. A cash-out mortgage consolidates your current mortgage, and you use the additional cash to pay off your credit card debt. A home equity loan (HEL) or a home equity line of credit (HELOC) doesn't affect your current mortgage and lets you utilize the new loan to consolidate your credit card debt.
Mortgage loans have low monthly payments because interest rates are low, and the repayment period is extended. It is possible to qualify with a relatively low FICO score, sometimes as low as 580. Your total mortgage debt cannot exceed about 80-85% of your home value. For example, if your home is worth $240,000, and you currently owe $150,000, your current available equity is $90,000. However, assuming lenders allow up to 80% loan to value ratio, you could borrow another $42,000 to consolidate debt.
- Low monthly payments - The most substantial benefit to consolidating debt in a home loan is a smaller monthly payment. Reducing the size of your monthly debt payments is incredibly helpful if you feel squeezed each month and want to increase your cash flow.
- Low-interest rates - Home loans offer the lowest fixed interest rates, often significantly lower than personal loans.
- Long time to pay off debt - The downside of low monthly payments is that you end up stretching your payments over a long period. If you don't make early payments, your total cost will be significantly more than a personal loan.
- Risk of losing your home - Consolidating credit card debt, which is unsecured debt, to a mortgage, means that if you default on the loan, the lender has the right to foreclose on your home.
Explore a credit counseling service and debt management plan
Credit counseling agencies offer a different form of credit card consolidation, one that consolidates your monthly payment. Their process starts with a confidential assessment of your debt and overall financial situation. If they feel that you can lower your credit card interest and afford the payments, they will offer a debt management plan (DMP).
A DMP consolidates your unsecured debts so that you make one payment each month. The Credit Counseling company that provides the DMP collects your payment and splits it up, sending payment to each of your creditors. They negotiate new interest rates, and in many cases, your plan administrator can get your creditors to waive penalties and fees, reduce your interest rate, and lower your monthly payment.
Typically, you pay off your debts through your DMP in three to five years. You're usually required to close your credit cards and refrain from seeking new credit until you finish your plan.
- Save Money - Credit card interest rates can be very high, sometimes over 25%. The DMP lowers your rates to about 10% and saves your money.
- Pay off debt - The DMP creates a fixed monthly payment, and you are debt-free in about 3-5 years.
- Puts you on top of your finances - The initial financial assessment helps you understand your debt situation and how to consolidate your credit card debt into an affordable payment.
- Fees cut into savings - Monthly fees of about $25 for 60 months means $1500 less in savings.
- Freeze on credit - In general, you have to stop using your credit cards and can't apply for new credit.
- Lack of flexibility - You might need to enroll all of your credit card accounts, even if the interest rate is lower than that offered by the DMP company.
Use a debt relief solution
While not a traditional credit card debt consolidation solution, debt settlement is a program that consolidates your monthly payments. It is offered by professional debt help companies to help people who are suffering from a financial hardship that leaves them unable to make all their payments or are close to reaching that point.
Debt settlement works on unsecured debts such as credit cards, medical debts, and unsecured personal loans. You stop making payments to your credit card companies and consolidate all of your payments into a special account. A debt settlement program negotiates with your creditors on your behalf, working to settle your accounts for less than you owe. Historically, creditors are willing to forgive part of what you owe if you have a hardship and are not making your monthly payments as agreed.
The repayment period is about 3-5 years. Fees vary but are around 20-25% of your enrolled debt. Reputable companies do not collect upfront fees, and you pay only when a settlement is achieved.
- Pay off debt fast - Debt settlement programs let you pay off your debt in about 3-5 years.
- Save money - Debt settlement companies collect fees; however, the upside is that they negotiate to pay less than your enrolled debt, before adding on more late fees and interest. Industry figures show an average saving of about 30%, including fees, of the enrolled debt.
- Your credit is hurt - Since you stop making payments to your credit score is damaged. Debt settlement is not a program for someone looking to protect their credit; instead, it is for someone struggling with payments.
- Debt settlement isn't for everyone - In general, you need to be in financial hardship, struggling with monthly payments, and have significant debt, about $10,000 to enter a program.
- Collection calls don't stop - While in a credit card debt relief program, you might still receive debt collection calls.
Should you consolidate credit card debt?
Since there are different credit card consolidation solutions, it is hard to talk about universal pros and cons. You need to weigh each program on its own merits and make sure it is a good fit for your situation. Here are some handy tips to consider before consolidating your credit card debt.
Why you should consolidate credit card debt
If consolidating your credit cards improves your financial situation, then the answer is yes. Credit card consolidation simplifies your payment schedule and generally has a fixed payment.
Consolidate your debt only if the monthly payments are affordable. When comparing options, the two main benefits to compare are lower overall costs and the amount of time to pay off debt. Not everyone has the same needs, so consider these scenarios when deciding if you should consolidate credit card debt.
Why you shouldn’t consolidate credit card debt
Here are three reasons you shouldn’t consolidate your credit card debt.
- Beware of running up new debt.A credit card consolidation loan replaces your current debts with a new one. The best reason not to consolidate credit card debt is that you run up new debt. A common pitfall is that you end up with your old debt as a loan and then have new credit card debt.
- Rates and fees are too high.Another reason not to consolidate credit card debt is that the new loan has high-interest rates and fees, and you don’t save money. Sometimes a simple solution like a snowball payoff plan can save you lots of money without taking out a loan.
- Can’t stick to the plan.Consolidating debt isn’t an instant solution. No matter what credit card consolidation solution you choose, you need to make your payments on time.
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Debt statistics
If you are struggling with debt, you are not alone. According to the NY Federal Reserve total household debt as of Quarter Q1 2024 was $17.69 trillion. Student loan debt was $1.60 trillion and credit card debt was $1.12 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 10% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
The amount of debt and debt in collections vary by state. For example, in New Hampshire, 17% have any kind of debt in collections and the median debt in collections is $1672. Medical debt is common and 6% have that in collections. The median medical debt in collections is $500.
To maintain an excellent credit score it is vital to make timely payments. However, there are many circumstances that lead to late payments or debt in collections. The good news is that there are a lot of ways to deal with debt including debt consolidation and debt relief solutions.
