Credit Card Consolidation

What is Credit Card consolidation?

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Understanding credit card debt consolidation

If you want to take the first step to pay off your credit card debt, you might want to consider a debt consolidation loan. Credit card debt consolidation is when you take out a new loan to pay off your existing credit card debt. This new loan could come via a balance transfer to another credit card, a personal loan, a HELOC, or another type of loan.

Understand why debt consolidation can be an effective strategy for debt repayment in addition to learning about potential drawbacks of consolidating credit card debt.

To create a customized plan to get out of credit card debt, click here.

Benefits of credit card debt consolidation

If you have credit card debt with high-interest rates, consolidating your credit card debt with a loan can help you take the first step to paying it off.

Below are a few reasons why.

Lower interest rates = more savings: Many people consolidate their credit cards because the high-interest rates on their current cards make it incredibly difficult to pay them down. You may be able to consolidate your credit cards using a loan with a lower rate than you currently have. You could save a considerable amount of money this way.

Move to one payment: If you have several different credit cards, consolidating them into one new loan means you only have one payment to worry about. This will enable you to get more organized with your bills.

It might be easier to stay current: If you have trouble paying your credit card bills on time, consolidating your credit cards into one payment with a lower interest rate could help you to stay current on your bills. This would prevent you from getting late fees that could add to your debt load.

Learn more on how credit card consolidation works here.

Disadvantages of credit card debt consolidation

Like anything, consolidating credit cards has pros and cons. Some of the cons you should consider are mentioned below.

You’re still in debt: When you consolidate your credit cards, you might feel lighter or less stressed because you’ve moved your payments to a loan with a lower interest rate. However, you’re still liable for your debt, and you still have to make payments on it. The hope and the benefit are that the payments will be more manageable after consolidation.

You might have to pay fees: When you complete a balance transfer to another credit card or take out a debt consolidation loan, there may be fees you need to know about, such as transfer fees or origination fees. Before agreeing to any type of consolidation loan, make sure you read all the fine print and know what it will cost you to take on a new loan.

Consolidation won’t help identify your spending triggers: There are a variety of reasons that people end up in credit card debt and although credit card consolidation can help with payments and interest rates, it might not help resolve the underlying issues that drove you into debt in the first place. In fact, once your credit cards are “empty” again, it can tempt you to spend again, so keep that in mind.


Credit card consolidation options

There are many different credit card debt consolidation options. Below are some of the most common. Keep in mind that there are pros and cons to each option, and not every option will be available to you because they depend on credit score, your debt load, and more.
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Personal Loans

Credit Requirements:

Fair to Excellent

Consolidation Amount:

Up to $35,000

APR Range:

5.99% +

If you want to get away from credit cards altogether, a personal loan could be an effective way to consolidate your credit card debt. However, there are many different pros and cons to getting a personal loan to consolidate your credit card debt that you should consider.

Pros: The biggest benefit to a personal loan is that you will have a fixed monthly payment for a specific period of time. When you take out a personal loan, you request a specific amount of money and then agree with your lender to pay it back in a certain amount of time. This means that you can expect to pay the same monthly payment each month until your personal loan is paid off. You don’t have to worry about variable rates as long as you apply for fixed rate personal loans.

Another pro to taking out a personal loan to consolidate your credit card debt is that personal loans do not have balance transfer fees. You might, however, have a loan origination fee, so be sure to review your loan terms carefully.

Cons: But you’ll be hard pressed to find any personal loans with a 0% intro APR offers like credit cards. You’ll start paying interest from the time you take out the loan. Depending on your credit score, you might be able to score a personal loan with an APR that is much lower than what you might find with a credit card, which is why you should still spend time shopping around for the best rates.

Personal loan lenders consider a range of factors when deciding whether to approve or deny a loan application, including your credit score and debt to income ratio.

The reason that you need a good credit score for a personal loan, McClary explains, is that many personal loans are uncollateralized loans. This means that if you don’t pay back your loan, your lender doesn’t have anything to repossess from you as a penalty (like a car or a house). Because of this, lenders take on a great amount of risk to offer you a personal loan.

You can find personal loans for up to $40,000 at some lenders, which can make them a viable option if you’re looking to consolidate a significant amount of debt.

Home Equity Loan (HEL)

Credit Requirements:

Poor to Excellent

Consolidation Amount:

$25,000 – $150,000

APR Range:

2.99% +

A HEL stands for a Home Equity Loan. Equity is the value of your home minus what you owe on your mortgage. Under certain circumstances, you may be able to tap into this equity and borrow certain percentage of it by getting a HEL. You could hypothetically then use that home equity loan to pay down existing credit card debt, leaving you with one loan.

Pro: While you might be able to secure a home equity loan with a lower interest rate than some other loan options, you have to remember that you’re putting your home on the line.

Con: If you fail to make your payments, you run the risk of losing your home. “You’re collateralizing these balances with your home, and if you mess up or miss a few payments, your home is on the line,” McClary says. You don’t want to risk foreclosure simply because you were trying to consolidate credit card debt, so approach this type of debt consolidation with caution.

As mentioned above, a credit card transfer is best for those with $10,000 or less of credit card debt, and a personal loan might cap out at around $15,000. There is no specific dollar amount best for a HEL because it really depends on your risk tolerance and the amount of equity you have in your home. For example, if you only have $15,000 of equity in your home, you won’t be able to take out a $20,000 HEL.

“This is a space where people have to be very cautious about the lenders they work with because there are a lot of subprime lenders in the [home equity loan] space and you have to know how to shop competitively,” McClary warns.

He advises people to pull their credit reports first if they are thinking of taking out a HEL. That way, at least you know where you stand. From there, shop around at various lenders and remember that you don’t have to take the first loan you’re offered.


0% APR Balance Transfer Credit Cards


Credit Requirements:

Good to Excellent

Consolidation Amount:

Up to $10,000

APR Range:

0% APR

A balance transfer is the most common type of credit card consolidation. This is when you sign up for a new credit card — ideally one with a with a 0% introductory APR — and move your balance over.

Pros: By moving your credit card debt to a new card with a 0% intro APR offer, this gives you time to pay back your debt without having to pay extra money towards interest.

Cons: The downside of a balance transfer is that you will often have to pay a fee (typically around 3% to 5% your balance — check your terms to be sure) in order to complete the transfer. You also typically need good to excellent credit to qualify for some of the better balance transfer offers. Keep in mind also that these offers are introductory, which means that they will expire after a certain period of time, so be sure to check your terms carefully.

Bruce McClary, vice president of public relations and communications at the National Foundation for Credit Counseling, says that a balance transfer is best for people with credit card debt somewhere “at or below $10,000.”

“You want to develop a realistic plan to clear that balance before the end of the introductory APR period,” McClary told LendingTree.

Essentially, you don’t want to have a balance remaining when your 0% APR time period is up because then you will be thrust back in the cycle of having credit card debt with a high interest rate again.

Before choosing a balance transfer offer, make sure you look at the terms and conditions of each card. For example, if you have a lot of balances to transfer over, McClary says to make sure there is no limit on the number of balance transfers you’re allowed to make.

You also need to pay close attention to the deadline to complete the balance transfer. Deadlines vary depending on the card, and you may need to complete the transfer within a certain window of time, such as within 30-90 days of opening your card.

Also, keep in mind that even though your balance transfer might fall underneath the promotional 0% intro APR umbrella, that might not be the case when it comes to purchases on your card.

Your purchase APR could be much higher. At the same time, if you’re trying to get out of debt by completing a balance transfer, it might be wise to avoid making new purchases on this card altogether.

See how balance transfer eliminates debt in our Fastest Way to Pay Off $5,000 credit card debt article.

Alternative Consolidation Options

401(k) Loan

If you’ve built up a sizeable nest egg in your 401(k) over the years it might seem tempting to tap those savings when you find yourself in debt. One way to accomplish that is by taking out a 401(k) loan.

Some — but not all — 401(k) plans may allow you to borrow from them without incurring taxes or early withdrawal penalties. If your particular plan allows it, you can take out a 401(k) loan worth up to 50% of your vested retirement balance (so long as it’s not more than $50,000). It’s important to note, though, that you will be charged interest and the loan must be repaid within a specific time frame, typically five years unless you’re using the loan to purchase a home.

Although this option might be tempting as a way to consolidate your credit card debt, McClary cautions consumers to weigh all their borrowing options first. “[Borrowing from your 401(k)] sets back your progress for saving for retirement, and any interruption in this process can be so difficult to climb out of,” he says.

Not only will borrowing money from your 401(k) set back your retirement, but if you can’t pay back the loan, it could be treated as a distribution. According to the Bureau of Labor Statistics, this means that “tax penalties are imposed if the withdrawal is not for hardship purposes.” And if you happen to lose your job or quit, the balance of your 401(k) might come due immediately.

Debt Management Plan

Another option for credit card consolidation is to work with a non-profit credit counseling agency to develop a debt management plan.

With a debt management plan, you work together with the organization to develop a payment plan. It usually takes 3-5 years to work your way through your debt. The debt management company can help you get reduced fees. They can also help you get current and reduce the stress of collection calls. Keep in mind that when you decide to enroll in a debt management plan, there could be a note that you’re enrolled in one in your credit report. This note has no effect on your score, but it will be there nonetheless. You also won’t be able to get new credit cards or new loans while you work through the program.

You want to be careful of companies who offer to eliminate your debt for you rather than help you work through your debt as a credit counselor. These companies are often called debt settlement firms. Unlike credit counseling services like the NFCC, debt settlement companies are often for-profit businesses that may promise to negotiate down your debt with your lenders, charging fees for this service.

Many lenders do not work with debt settlement firms, so they may not be able to truly negotiate on your behalf. Beware of firms that charge fees upfront for their services and encourage you to stop making payments on your debts.

A safer bet is to look for a nonprofit credit counseling service. The benefit of a debt management plan is that you get some accountability. Instead of navigating the credit card debt repayment waters on your own, you’ll have someone to guide you through the process. Credit counselors can help you negotiate late fees, reduce interest rates, and more.

Frequently Asked Questions

Consolidating your debt may help improve your credit score so long as you make on-time payments and make serious progress lowering your total debt load. The most impactful part of your credit score (constituting 35% of your score) is your payment history.

But just how much your score might improve depends on a lot of factors and the answer is different for each person. That’s because each consumer’s credit score is affected differently when it comes to credit card consolidation depending on how many new accounts they open, whether or not they were previously late on payments, and other factors. The more negative marks on your credit report, the longer it may take to see your score improve.

Although you might see credit score changes initially, your score should improve over the long term as long as you make your payments on time every time and don’t take on extensive amounts of new debt. The same is true for debt management plans. With a debt management plan, your score might be initially affected if part of the plan is closing your old accounts (that would impact the length of credit history, another key factor in your credit score.) However, what’s most important is that your long-term credit score will improve because you’ll get a better handle on your finances, avoid late fees, and pay on time every time.

Credit card consolidation can be a good first step in eliminating credit card debt but is only worth it if you take the steps to eliminate your credit card debt completely. Consolidating credit card debt solely depends on your own personal situation. While each methods has its benefit and risks

As evidenced above, there are many pros and cons to the different credit card debt consolidation options. Carefully look through each option and assess your risk tolerance. For example, are you willing to put a lien on your home with a HEL or is that too risky for you? Then, consider the amount of credit card debt you have before choosing one. For example, if you have over $10,000 of credit card debt, a personal loan might be preferable to a balance transfer so you have more time to pay off your loan.

If you don’t want to rack up more credit card debt on your empty cards after moving your credit card balance, you can shred them. Closing your accounts may adversely impact your score, because it could lower your average age of credit or increase your total utilization percentage. However, if your cards have annual fees, it might make more sense to close them anyway rather than paying fees for cards you don’t use.

If you don’t want to take out a credit card consolidation loan, you can aggressively pay down your balances yourself by spending less, finding new income streams, and applying all extra funds to your credit cards until they are paid off. We’re big fans of the snowball method ourselves.

Although filing for bankruptcy could eliminate much of your debt, it won’t solve your spending problems and could be hugely detrimental to your ability to get credit in the future. Bankruptcy is a complete last resort. Try consolidating your credit card debt with a lower interest rate first and work hard to aggressively pay off your credit card debt before considering bankruptcy.