Credit Card Consolidation Options

Highlights

  • Review the pros and cons of different credit card consolidation options.
  • Compare do-it-yourself and professional credit card consolidation approaches.
  • Pick the credit card consolidation option that fits your budget, credit, and goals.
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How Credit Card Consolidation Can Save You Money

Saving money is a priority these days. According to the NY Federal Reserve, as of the end of 2016, American households are carrying close to $800 billion in credit card debt and total household debt is over $12.5 trillion.  Many people are looking at credit card consolidation as a way to save money.

Credit card consolidation can save you money, by reducing your interest so you pay your debts off faster and at a lower cost. Debt consolidation also simplifies your debts, because you’ll only have one bill to pay. Despite that, credit card consolidation isn’t always your best debt relief option. In some cases, if you are not careful, credit card consolidation could even endanger your home.

You have several credit card consolidation options. You can look for professional help with your credit card consolidation or you can try to do it on your own.

Before you decide which way is best for you to consolidate your credit card debt, it's important to weigh the pros and cons of each credit card consolidation option.

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Do it Yourself Debt Consolidation

A balance transfer is the simplest credit card consolidation option that you can do on your own. With a balance transfer you move your higher interest debt to a lower interest card. Though there are fewer low-interest balance transfer offers available than a few years ago, they do exist.

Balance Transfer Pros

  • Lower Interest Rates: Reducing your interest rate allows you pay off your debts faster. Less of your payment is going to interest and more is going to pay down your principal balance.
  • Less Paperwork: You have fewer bills to pay each month.

Balance Transfer Cons

  • Short-term Solution: The low interest rate that comes with your balance transfer lasts only short time. After six months or so, your rate will rise. Unless you pay down the debt aggressively during the low interest period, you will be back to square one when the rate increases.
  • Approval is Difficult: It takes strong credit to qualify for a balance transfer. Without strong credit, a balance transfer won't help you.
  • High Fees: Balance transfer fees are typically 3-4% of the balance you transfer.

Credit Card Consolidation Loans

  1. Using Home Equity: Borrowing against the equity in your home, rolling your credit card debt into the new loan balance, can be a very effective credit card consolidation option.

    Home Equity Pros

    • Low Rates: Home equity credit card consolidation can get you the lowest long term interest rate.
    • Tax Benefit: The interest you pay on your mortgage debt is possibly tax deductible.
    • Smaller Monthly Payment: You can reduce the size of your monthly payment to service your credit card debt

    Home Equity Cons

    • Substantial Equity Required: You need to have a home with equity. It is important to check to see the value of your home. In general, a cash-out has a lower loan to value ratio (LTV) then a purchase or a regular mortgage refinance. For example Fannie Mae allows up to 80% in a standard cash-out refinance. 
    • Increased Risk: By turning unsecured credit card debt into secured debt, you put your home at greater risk.If you don't pay your mortgage you face foreclosure and the loss of your home.
    • Longer Term/More Interest: Although the interest rate is usually much lower for a mortgage, since the payment period is for up to 30 years, the overall financial costs may be higher.
  2. Unsecured Personal Loans: Borrowing money from a bank, credit union, or online lender to pay off all your credit debt and have one new loan.

    Personal Loan Pros

    • One Payment: An unsecured credit card consolidation loan can give you the convenience of paying off all your credit card bills in one monthly payment.

    Personal Loan Cons

    • High Interest Rates: Unsecured loans can come at a very high interest rate. For example, according to the Wells Fargo site, as of March 2017, "The Annual Percentage Rate (APR) is fixed and ranges from 6.99% to 23.99% for the unsecured Personal Loan".  So, if you don't qualify for the best rates, borrowing at a high cost is obviously not a helpful way to consolidate credit debt.
    • Hard to Qualify: Strong credit and income are required to get an unsecured personal loan

Professional Credit Card Consolidation Programs

Your credit card consolidation may require professional assistance. There are two main professional credit card consolidation programs.

  1. Credit Counseling: A credit counseling program's can debt management plan can speed up the time it takes to pay off your debt.

    Credit Counseling Pros

    • Lower Rates: A credit counseling program can lower your interest rates. If high interest rates are your biggest problem, credit counseling can be very helpful.
    • One Payment: You make one monthly payment to the credit counseling program.
    • Lower Fees: Late fees and over limit fees may be waived.
    • No collection calls: A payment is being sent to your creditors each month, so you won't receive collection calls or notices.

    Credit Counseling Cons

    • High dropout rate: Approximately three quarters of credit counseling customers do not complete the program, which takes about five years on average to finish.
    • Credit Profile damage: Though enrollment in a credit counseling program does not automatically lower your FICO score, it is noted on your credit report that your accounts are enrolled in a debt management program. Many creditors will treat you as though you are in a Chapter 13 bankruptcy, while you are in credit counseling.
    • Interest hike: Because all your credit cards must be enrolled, you have to take the interest rate the credit counseling program sets up with your creditors, even if it is higher than the one you currently have.
  2. Debt Settlement: A debt settlement program negotiates lower principal balances on your credit card debt, so you pay back less than you owe.

    Debt Settlement Pros

    • Lower overall costs: A debt settlement credit card consolidation will resolve your debt at the lowest overall cost in the shortest time while avoiding bankruptcy
    • Lower monthly payment: Your payment in a debt settlement program is usually smaller than the minimum monthly payments on your credit cards.
    • No upfront fees: If you find the right debt settlement company, you won't pay any fees for settling an account until that account is settled.

    Debt Settlement Cons

    • Credit rating damage: No monthly payment is being made to your creditors in a debt settlement program, so your credit score will drop.
    • Collection efforts: Only about 2% of all accounts enrolled in a debt settlement program result in legal action by the creditors. However, you can face aggressive collection efforts, including a lawsuit, when enrolled in debt settlement. If credit card consolidation will save money, then it's worth it, but don't consolidate simply to reduce the total number of bills if it won't reduce your interest rate or the cost of the debt.

Making a Credit Card Consolidation Choice

Even after you understand pros and cons of the various credit card consolidation options, there is more for you to consider. Here are some important factors for you to consider:

  • Monthly Payment Size: Debt settlement offers the lowest monthly payment.
  • Credit Score: It takes a strong credit score to qualify for a personal loan, a cash-out refinance, or a balance transfer.
  • Credit Impact: If your credit score is more important to you than getting out of debt, credit counseling is a better choice than debt settlement.
  • Lowest Total Cost: Debt settlement has the lowest total cost for resolving debt while avoiding bankruptcy.
  • Assets: If you own a home with equity, look at consolidating your credit card debt in a cash-out refinance.
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