Credit Card Consolidation: How It Works & When to Use It

Understand what it is (and isn't)
8 minute read | 12/27/18Dec. 27, 2018

Trying to pay down credit card debt can be a daunting task, thanks in large part to high interest rates. And, thanks to rising Fed rates, there’s a chance your debt will become even more expensive.

Every time you make a payment, it feels like a large portion is going toward your interest charges — and not toward actually reducing your debt. And if you have multiple credit cards, you’re stuck making several of these less-effective payments each month.

In a better world, you’d have one payment to keep track of and more of each payment would go toward getting rid of your debt. That way, you’d spend less money on your debt and get rid of that downward spiral feeling of being in debt faster.

The good news is that it’s possible to make it happen, thanks to credit card consolidation. Here’s what you need to know about how to it works and when it makes sense for you.

What is Credit Card Consolidation?

For the most part, credit card consolidation is just what it sounds like: a way of getting all your credit card debt into one place so that it’s easier to manage. Sometimes, it’s also called credit card refinancing.

Basically, you decide to bundle everything together so that you only make one payment and, in many cases, only have to worry about one interest rate. The idea is that by replacing all of your credit card debts with one new loan or other arrangement, more of your payment money will go toward reducing your debt.

Five of the best ways to combine your credit card debt are:

  • Credit card balance transfer
  • Credit card consolidation loan
  • Home equity loan
  • 401(k) loan
  • Debt management plan

The method you choose depends on your current financial situation, including your credit score and what you qualify for. Before you settle on a strategy for credit card consolidation, make sure you understand what each entails, and how it fits into your long-term financial planning.

5 Best Ways to Consolidate Credit Card Debt

There is no one “right” way to tackle your credit card debt. As with all things in personal finance, it’s really about what works best for you, depending on your individual circumstances. Here are five of the best options to consider as you prepare to turbo-charge your debt paydown plan.

1. Credit Card Balance Transfer

With a credit card balance transfer, you apply for a new credit card with a 0% APR offer. You transfer all your other credit card balances to the new card. Because you’re not paying interest, every single penny of your monthly payment goes toward reducing what you owe.

Before you move forward with this strategy, though, it’s important to understand that you need to have good to excellent credit in order to qualify for a 0% APR balance transfer offer. On top of that, the 0% interest is only available for a limited time. You might only get the deal for 6 to 24 months. The better your credit score, though, the longer your introductory rate is likely to be.

In most cases, balances are transferred to your new credit card within 14 days. Be aware that you might not be approved for a credit limit high enough to cover all of your outstanding balances. Start by moving the highest-rate balances to your balance transfer card, and then only pay the minimum while you tackle the remainder of the debt.

When using this method of credit card consolidation, make sure you have a plan for paying off the debt within the promotional time frame. Figure out how much you need to pay each month to reach your target. Otherwise, once the introductory period is over, you’ll be stuck paying a regular credit card interest rate — something that could set you back in your efforts.

2. Credit Card Consolidation Loan

If you can’t get a credit card balance transfer deal that works for you, or if you know it will take you longer than a couple of years to pay off your debt, a credit card debt consolidation loan can be a viable choice.

This is a type of personal loan that you can get, depending on your credit and income situation. In many cases, you can borrow up to $30,000 (or even more) to pay off your smaller credit card debts. Once you’ve paid off all your credit cards, you only have to make one debt payment each month, and you only have one (usually lower) interest rate.

When I needed to consolidate my own credit card debt years ago, this is the method I chose. Even though I had to pay a 9% APR, it was still better than paying more than 17.99% APR on my credit cards. I was able to pay off my credit cards in three years, instead of taking three times as long and paying four times as much in interest.

Because it’s a loan, the interest rate you get depends on your credit. Personal loan rates range from as low as 7% APR to more than 20% APR. Before you move forward, make sure you get a quote that will result in a lower overall interest rate. Personal loans for debt consolidation are usually available for those with fair to excellent credit.

Depending on the company you use, it can take a few days to get a debt consolidation loan. I found my loan online, was approved, and had my money within seven days. However, depending on your situation, it might take a little longer.

3. Home Equity Loan

Do you own your home? If so, you might be able to pay off your credit card debt by tapping into the equity you’ve built up.

This type of credit card consolidation is usually ideal when you have a large amount of credit card debt and you can’t get a credit card balance transfer or personal loan big enough to pay off what you owe. With the equity in your home, you can secure a loan and even get a good a reasonably good interest rate — even if you have only fair credit.

Be careful with a home equity loan, though. Credit card debt is usually unsecured, meaning that your debt isn’t tied to any of your assets. That changes once you use a home equity loan to pay off your balances. Now that debt is secured by your house. If you can’t make your payments, you could lose your home.

Depending on your bank, and how long it takes to complete an appraisal, it can take between 14 and 30 days to get a home equity loan. As a result, it’s a good idea to have a plan in place to keep making your payments until you get the money from your loan.

4. 401(k) Loan

Maybe you don’t own your home, or you don’t want to put it at risk. Another way to consolidate your credit card debt when you can’t get a large enough balance transfer or personal loan is to turn to your retirement account.

Many 401(k) plans allow you to take a loan, even if you don’t have pristine credit. This can be one way to access capital to help you tackle your debt. Most 401(k) loans have five-year terms and low interest rates — and the interest you pay is to yourself, since the payments go back into your retirement plan.

A 401(k) plan can feel like the perfect solution, but there are still risks. First, if you leave your job (whether you quit or are laid off), the entire outstanding amount becomes due within a short period of time. If you don’t get the money back into your plan, you’re stuck with penalties from the IRS, and the money is taxed at your regular rate.

Another consideration is the fact that the money isn’t earning a return on behalf of your future self when it’s not in your account. Creditors can’t raid your retirement plan if you default on your credit card debt, so think very carefully before you borrow against your future in order to pay off your credit cards.

5. Debt Management Plan

A debt management plan is a type of credit card consolidation that involves consolidating your payments, not your debt. If you’re struggling to make minimum payments and you’re not sure how to tackle your debt on your own, you can work with a credit counselor to put together a plan to pay your creditors.

With this method, you make a payment to the debt management company and they send payments to your creditors. If you’re stressed about the number of payments you have, this can streamline the process. On top of that, some debt management companies can help you negotiate lower interest rates and reduce your fees.

On the downside, though, you might not be able to use your credit cards during your debt management plan, and some creditors may even close your account. You might also have to pay fees to the debt management company. However, if you’re struggling and you don’t have the credit or income to qualify for debt-based solutions, this can be a way to get back on track.

For best results, find a reputable company to work with and consider contacting the NFCC. You can set up plans usually for between three and five years, which will still get you out of debt faster than paying the minimum on most credit cards.

Is Consolidating Credit Cards Bad for Your Credit?

The impact debt consolidation has on your credit depends on your current situation, as well as the method that you choose to manage your debt as you pay it down.

In many cases, you’ll see a slight dip in your credit score reflecting the hard credit inquiry required when you borrow money. Additionally, you’ll have a new account, lowering the average age of your credit. However, these are factors that don’t have a big impact, so your credit score shouldn’t fall too much.

For the most part, if you pay off your credit card balances, you’re improving your credit utilization ratio, which is the second-most important factor in your credit score. Plus, if you haven’t had missed payments in the past, keeping up with your new credit payment should only add to your positive payment history. When done carefully, credit card consolidation can actually improve your credit score in a few months.

Your likely negative impact comes if you close your credit card accounts after the consolidation. Closing account reduces your utilization ratio, and that can bring down score. It’s also a risk if you run up bills on your newly-cleared credit cards, squandering your improved credit utilization.

Another risk comes when you choose a debt management plan. Your creditors might close accounts, impacting your credit utilization. Additionally, if you don’t carefully vet your debt management company, you could wind up paying money to them and they could pay late, hurting your credit.

Is Consolidating Credit Cards a Good Idea?

Now that we have covered the basics, you’re likely wondering if consolidating your loans is a good idea. In the end, you need to consider your financial situation and how quickly you’ll get out of debt without credit card consolidation.

Consolidating credit cards can help you get all your debt in one place so that it’s easier to keep track of. Plus, you might also be able to save money on interest and put together a plan that gets you out of debt faster.

Before you use any strategy, though, you first need to make sure you’ve identified the reason you’re overwhelmed by debt in the first place. In some cases, it’s due to a job loss, medical emergency, or some other issue beyond your control. Once you get your bearings and start moving forward, you can evaluate debt consolidation strategies.

On the other hand, you might need to change your spending habits before you move forward. If you’re still spending more than you earn each month, credit card consolidation won’t help you — it will just get you further in debt.

Start by addressing the cause of the situation, and once you’ve changed your habits, you can run the numbers and see which debt consolidation strategy is likely to save you the most money and get you out of debt the fastest.

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