What is credit card debt consolidation?

Juggling multiple credit card balances can be stressful. The good news is there are ways to simplify repaying it, including credit card consolidation.

Let’s take a closer look at what credit card consolidation is, how to pursue it, and the pros and cons of this strategy.

What is credit card consolidation?

Credit card consolidation is when you take out a new or existing line of credit, like a loan or another credit card, to pay off your card balances. When you consolidate cards, you replace multiple monthly payments of different amounts, due dates, and interest rates with a single monthly payment.

Why should I consolidate?

Credit card consolidation can make it easier to keep track of payments and may even lower your payments. You may be less likely to miss payments, thereby avoiding late fees, credit damage, and higher interest charges. Through this strategy, you can simplify your finances and eventually become debt-free.

How to consolidate debt

You can consolidate your credit card debt in several ways, but the ideal strategy depends on your unique situation. Here are a few options you might want to explore.

• Personal loan: With a personal loan or debt consolidation loan, you’ll receive a lump sum of money upfront. Then, you’ll use the cash to repay your credit card balances. Some lenders will distribute the funds to your creditors directly. You’ll pay back the loan with interest over a set period that you agree to in advance.
• Balance transfer credit card: A balance transfer card with a 0% annual percentage rate (APR) introductory offer can help you pay off credit card debt and save a lot in interest. But you’ll be on the hook for a transfer fee for the amount you transfer. Also, if you carry a balance once the offer ends (usually within 12 to 21 months), you’ll have to pay the card’s regular interest rate, which is often high.
• Debt management plan: You can work with an accredited credit counseling agency to set up a debt management plan and repay your credit card debt. You’ll agree to make a monthly payment to the agency directly so they can pay your creditors for you. Keep in mind you might have to pay a fee to take advantage of this service, but beware of scammers and work only with a reputable company.
• Home equity line of credit (HELOC): A HELOC is a revolving line of credit that’s secured to the equity in your home. Since you’ll use your home as collateral, you might be able to land a lower interest rate than you’d get with a personal loan. But you may have to settle for a variable interest rate, which is only a good option if you have smaller balances you can repay quickly, and your home is on the line if you can’t make your payments.
• Home equity loan: A home equity loan is a lot like a HELOC, as it’s also secured to the equity you have in your home. The difference is you’ll receive a lump sum of money upfront and pay it back via fixed monthly payments over a set time.

Consolidation pros

The most noteworthy benefits of credit card consolidation include:

• Simplify your finances: If you’re trying to pay off several credit cards, it can be difficult to keep track of your payment amounts and due dates. Consolidating your credit card balances leaves you with one payment to keep track of.
• Reduce your interest rate: Credit cards often charge sky-high interest rates. You might be able to secure a lower rate by consolidating your balances, especially if your credit is good or excellent.
• Lower your payments: A lower interest rate leads to lower monthly payments. With lower payments, you’ll have more wiggle room in your budget and be able to focus on other financial goals.
• Improve your credit score: Your credit utilization, or the amount of credit you’re using compared to the total amount of your available credit, impacts your credit score. Credit card consolidation can lower your credit utilization and, in turn, help your score.
• Repay debt faster: If you can lock in a lower rate and lower monthly payments, you may find it easier to pay off your credit card debt sooner. This can save you a significant amount of money and stress.

Consolidation cons

Consider the following drawbacks to credit card consolidation:

• No guarantee of a lower interest rate: To get a lower interest rate than your current rates, you’ll usually need good to excellent credit. If your credit isn’t in the best shape, you might not qualify for a better rate.
• Potential fees: Depending on the consolidation method you choose, you may have to pay fees. Some examples of these fees include origination fees, balance transfer fees, and closing costs.
• May take longer to repay: Consolidating your credit card debt doesn’t always mean you’ll be able to repay your debt faster. If you choose a loan with a longer repayment term, for example, it may take you longer.
• Credit issues: When you apply for new credit, the lender may perform a hard credit check, which can temporarily lower your credit score. This can be problematic if you’re already struggling with your credit.
• Might end up with more debt: Credit card consolidation can help you simplify the payoff process of your current debt. But it won’t help you avoid racking up more debt and may even tempt you to overspend.

Is debt consolidation right for me?

Whether you should consolidate your credit card debt depends on your particular financial situation.

You may want to consider this option if any of these scenarios apply to you.

• You’re overwhelmed with credit card debt: If you have a lot of credit card debt and are looking for a way to simplify the payoff process, credit card consolidation might be a good option.
• You can land a lower interest rate: Personal loans, balance transfer credit cards with 0% APR offers, and home equity products often come with lower interest rates than credit cards. If you’re able to get a lower rate, consolidating your credit card debt may be worthwhile.
• You want a fixed monthly payment: It can be difficult to manage fluctuating payments. If you can lock in a debt consolidation loan with a fixed monthly payment, for example, you may find it easier to manage your debt payoff.

Credit card consolidation might not make sense if:

• You only have a small amount of credit card debt: There may not be any benefit to credit card consolidation if you have a smaller amount to pay off. You’ll have to determine whether the process is worth it.
• You can’t land a better rate: If you’re unable to lock in a lower interest rate than your current one, credit card consolidation may not be a good option. This is especially true if interest savings is your main goal.