Credit card debt consolidation offers one easy monthly payment for all your debt.
Why is credit card debt so problematic to pay off?
Looking for relief from high interest rate credit card debt? Credit card debt consolidation could be the answer you need. Credit card debt has a way of causing problems for your finances. Other debts like loans have fixed payments that you can plan around in your budget. But with credit cards, the monthly bills on credit cards vary based on how much you owe.
Fact: Credit cards are revolving debt, meaning the payments change as your balance increases or decreases.
In some cases, this means you must pay the whole balance off every month (like with American Express cards); these are known as charge cards. In most other cases with general-purpose credit cards like Visa and MasterCard, you pay a percentage of balance owed. This is also how most high-interest store credit cards work. But in all cases, you can’t always plan ahead for how much income your credit card payments will use each month.
As a result, when you overcharge or rely too much on credit, your bills can get out of control and start to take over your budget. You pay more and more, but never seem to get anywhere. That’s because even with average credit card APR, interest charges eat up more than half of every payment you make. So, even though you meet the minimum payments month after month, you don’t get any closer to zero.
This is where credit card debt consolidation comes in handy, because you rein in those high payments and simplify them into one low payment instead. There are several ways to accomplish this goal. Choosing the right credit consolidation option depends on:
- How much you owe, in total
- The status of your debts (current, delinquent, charged off)
- Your credit score
- The cash flow available in your budget
- Your credit habits
How credit card debt consolidation works
Credit card debt consolidation combines multiple debts into one payment at the lowest interest rate possible. There are several ways to do this. There are also ways to consolidate other types of debt, such as student loan debt consolidation. But you generally can only consolidate similar types of debt. So, if you have both credit cards and student loan to repay, you may need two solutions to pay off everything you owe.
What can you consolidate?
That’s not to say that other debts can’t be included in your credit card debt consolidation plan. With most solutions, you can consolidate other types of unsecured debt. This includes:
- Credit cards
- Store cards
- Charge cards
- Unsecured personal loans
- Unpaid medical bills
- Debts in collection
- Payday loans
Understanding the goals of consolidation
With credit card debt consolidation, all these unsecured debts are rolled into one payment. You have two goals when you consolidate:
- Simplify and lower your total monthly payments.
- Reduce the interest rates applied to your debt.
The first part makes it easier to manage debt in your budget. You only have one bill to worry about. And depending on which consolidation option you choose, you may even have fixed monthly payments. That can make it easier to plan ahead for debt repayment than the typical revolving payments you see with credit cards.
As for reducing your interest rates, the goal is to get the monthly interest charges down as low as possible. This allows you to focus on paying off the actual debt (principal), rather than just the accrued interest charges. Since more of each payment goes to eliminating principal, you can often get out of faster even though you may pay less each month.
No matter which solution you decide to use, your goal should be to achieve an interest rate that’s no higher than 11 percent. Ideally, you want the interest to be even less than that. If the interest rate is any higher, you won’t get the benefits you need to pay off the debt quickly.
Don’t pay more than you need to as you work to eliminate credit card debt! See how much you time, money and energy you could save with debt consolidation.
4 ways to consolidate credit card debt
There’s more than one way to consolidate – in fact, there are four. We’ve put together the following chart to help you understand each of the four options.
|Credit Card Balance Transfer||Unsecured Personal Debt Consolidation Loan||Secured Consolidation Loan (Home Equity Loan)||Debt Management Program|
|Assisted or DIY?||DIY||DIY||DIY||Assisted|
|Credit Needed to Qualify||Good FICO (≥700)||Good FICO (≥700)||Fair FICO (≥650)||n/a|
|Interest Rate||Balance transfer APR based on credit score||APR based on credit score||APR based on credit score||Negotiated by a credit counselor on your behalf|
|Collateral required||None||None||Your home or another property||None|
Here is how each of these solutions work:
Credit card balance transfer
With balance transfers, you move the balances from your existing credit cards to a new balance transfer credit card. If you have a good credit score, these cards offer 0% APR promotion periods when you first open the account. Promotion periods range from 6-24 months, depending on your score. Ideally, with excellent credit, you can qualify for 0% APR for up to 48 months. That gives you two years (24 payments) to focus solely on paying off principal interest-free.
Be aware there may also be fees associated with transferring your balances; understand these fees before you apply. Fees generally range from $3 to 3% of each balance transferred.
Unsecured personal debt consolidation loans
To use this solution, you take out an unsecured personal loan (a loan without collateral). You use the money you receive from the loan to pay off your credit cards and other debts. Once executed, the only debt you have to pay off is the loan, itself. This consolidation option offers the benefit of fixed monthly payments.
The costs to use this option are also relatively low; you usually only need to pay loan origination fees, although some lenders may waive them. Other than that, the only cost is the applied interest charges. With good credit, you can usually qualify for a low rate, particularly compared to the relatively high rates on credit cards.
Home equity loan
This is a secured version of the loan described above. If you can’t qualify for the low interest you need without collateral, you may be able borrow against the equity in your home. This allows you to qualify for lower interest rates, even with a weaker credit score. If you take out a home equity loan, you enjoy fixed monthly payments, just like you do with unsecured loans.
There’s also an open-end credit line version of this loan called a Home Equity Line of Credit (HELOC). In this case, you qualify for a credit limit based on your equity that you can withdraw money from as needed. You pay interest-only for 10 years, then start paying principal plus interest. As a result, your payments increase significantly after 10 years.
Be aware that borrowing against your equity to pay off credit card debt is the highest risk option ! If something happens and you can’t make the payments, you can put yourself at risk of foreclosure. This is why experts often recommend that you should tap equity solely for the purpose of paying off credit card debt. You effectively convert unsecured debt to secured. The cost savings is rarely worth the increased risk.
Still, if you plan on using a home equity loan or HELOC for other purposes, such as a home renovation project, you can use some of the funds to pay off a few credit card balances. But always consider your options carefully and understand the risks before you decide to touch the equity you have built up in your biggest asset.
Debt management program
A debt management program is essentially a professionally assisted form of debt consolidation. You enroll in the program, through a credit counseling agency. With this option, you still owe your original creditors and you don’t take out any new financing. The credit counseling team basically acts as a go-between to set up a repayment plan that works for you and your creditors. They also negotiate on your behalf to reduce or eliminate interest charges and stop future penalties.
Once the plan is set up, you make one monthly payment to the credit counseling agency. Then they distribute it to your creditors. Your credit card accounts are frozen, so you can’t make new charges while you are enrolled. The cost of setting up a debt management program varies by state and depends on your budget. But, by law, fees are capped everywhere at $79.
If you can’t qualify to consolidate debt on your own and/or don’t want to borrow against your home, a debt management program is usually your best option.
Making sure you choose the right option for credit card debt consolidation
Every financial situation is different. So, the solution that worked for a friend or neighbor may not always work for you. What’s more, choosing the wrong solution can make your situation worse, instead of better. So, you need to choose carefully.
- If you don’t have a good credit score, don’t bother with balance transfers and consolidation loans.
- You generally want to avoid using home equity unless:
- You have other reasons to tap your equity and paying off credit card debt is simply a secondary purpose.
- You’re certain that you will not encounter any challenges meeting the payments; otherwise, you risk foreclosure.
- If you use a balance transfer, you should be able to pay off the full balance before the 0% APR period ends.
- Most debt consolidation loans have a term of 4-5 years (48-60 payments); the monthly payments depend on the term and how much you owe; thus, this usually only works if you owe less than $35,000, depending on your income.
- Finally, if you have a bad credit habit, DIY solutions are risky! They eliminate your balances and don’t freeze the accounts. That means you can start charging again immediately after you consolidate. You end up with more debt, instead of less.
You have 5 credit cards, 2 store cards and total credit card debt of $45,000. Your FICO credit score is 550. You purchased your home last year using an FHA loan program. Which solution should you use?
a. Balance transfer
b. Unsecured debt consolidation loan
c. Home equity loan
d. Debt management program
Tip: Since your home was purchased with an FHA loan, you probably don’t have equity available. A 550 credit score means you can’t use the the other two options.
d. Debt management program
The benefits of debt consolidation
The biggest benefit of any credit card debt consolidation option is that you make a plan that helps you eliminate debt quickly so you can pay off your debt in-full. This helps you avoid credit score damage. It can even help you build credit as you reduce debt and build positive credit history.
This is one advantage that consolidation provides over debt settlement. Settlement programs may help you pay off debt faster, but they are guaranteed to hurt your credit. If you care about credit damage, then consolidation is usually the better choice.
The second benefit of consolidation is how much money you can save. High interest means your debt grows faster each month with more interest added. On a high interest rate credit card, your debt actually cost more money. If you reduce the interest rate, you save money as you pay off debt.
This is especially important for high-rate credit cards. Reward credit cards and store cards often have rates above 20% APR. More than two thirds of each payment covers accrued interest charges. Plus, on a minimum payment schedule, you can end up paying more in interest charges than the amount you originally charged to the card.
This is why consolidation often offers the benefit of getting you out of debt faster even though you pay less each month. This is most commonly seen with debt consolidation loans and debt management programs. Statistics show that the average debt management program client sees their total monthly payments reduced by up to 30-50%.
Finally, debt consolidation simplifies your life by streamlining your monthly debt payments. Instead of worrying about keeping up with multiple bills, you only have one payment to worry about. You can stop juggling bills and putting off expenses that you can’t afford to cover that month.
The risks of debt consolidation
What you risk with DIY solutions
With any DIY option for consolidating debt, the risk is really a matter of will power. When you consolidate, your existing credit card balances drop to zero. But this doesn’t mean that you’re out of the woods with debt! You still have just as much debt to pay off as you did before consolidation.
So, if you start spending on your credit cards before the consolidated debt is paid off in full, you make your situation worse instead of better. And it can be really tempting to start spending when you have zero balances. Your creditors may make it even tougher by increasing your credit limits because you’ve paid off your debt.
This means you must have the discipline to avoid making new charges until you pay off the consolidated debt. You must set a budget that covers all your daily expenses and gives you extra cash flow to cover emergency expenses. That way, you can avoid new charges that just run up your balances again.
What you risk with a debt management program
Running up new balances isn’t an issue with a debt management program, because your accounts are frozen when you enroll. You can’t make any new charges on your existing accounts. You also can’t open new credit cards until you complete the program.
Of course, this presents another challenge. You don’t have those credit lines to depend on every month if you need or want something. The credit counseling agency will help you set a budget, but you still have to learn how to accept living credit-free. And that’s not always easy, especially if you’ve developed credit dependence.
Why using home equity is your riskist option
The biggest risk of consolidation is only faced when you use a home equity loan or HELOC. You’re taking unsecured debt and securing it as your borrow against your home equity. If you fall behind on credit card payments, they can threaten as much as they like, but a creditor can’t take your home. The worst they can do is sue you in civil court. The only way you’d be at risk of losing your home to cover debt repayment is if you file for Chapter 7 bankruptcy.
On the other hand, using home equity means your home is at risk of foreclosure if you fall behind. If you can’t make payments on a home equity loan or HELOC, the lender can start a foreclosure action. So, while your credit card bills may be paid off, now you need to worry about losing your home.
This risk is particularly high with a HELOC because of the balloon payments. You pay interest only for 10 years during the “draw” period, so the payments relatively low. But at 10 years the repayment period starts. Now you’re paying principal plus interest, so your payments jump significantly.
If you still aren’t sure which option is right for you, Debt.com can connect you with a certified debt professional who can help you identify the best way to consolidate in your situation.
10 Tips and Tricks for Credit Card Debt Consolidation
Use these 10 tips and tricks to consolidate credit card debt successfully:
- Set a budget after you consolidate so you can ensure you have enough income to cover your expenses.
- Make sure to leave money for emergency savings, so you can avoid new charges for unexpected expenses.
- Don’t make any new charges until you have your debt paid off.
- Pay off the debt as quickly as possible! If you have extra cash, like from a tax refund, make extra payments.
- Once you complete a consolidation plan, download your credit reports for free to ensure your accounts show as paid.
- Consider using a credit monitoring service to track the impact of consolidation and debt repayment on your credit score.
- If you’re unsure which option is right for you, talk to a consumer credit counselor for an expert opinion.
- Don’t be shy to re-consolidate if you can get a better interest rate or have other debt payments that are eating up your income.
- Always check the total cost of getting out of debt after consolidation versus the total cost without consolidation. If you don’t see significant savings, find another option!
- Don’t let yourself lose energy! Debt elimination is like a diet – about six months in, you may get tired of budgeting and avoiding credit cards. But stick with it, because you don’t want yo-yo debt!
Credit Card Debt Consolidation FAQ
Q: Can I consolidate a debt consolidation loan?
A: Yes. If you consolidate debt with a personal loan and still struggle to make your payments, reconsolidate. You can roll an existing debt consolidation loan into a new consolidation loan with additional credit cards. This can be beneficial if:
- The interest rate on the new loan will be lower than the rate on the existing loan.
- You need to lower your total monthly payments again through reconsolidation.
Additionally, you can include debt consolidation loans into a debt management program. If you see that you’re not paying down debt fast enough or you run up new balances, this may be the best choice. This is often necessary if you don’t set a budget that helps you avoid making new charges after you consolidate.
Q: Can I consolidate credit card debt into a mortgage?
A: Yes. There are two options for borrowing that are considered second mortgages – a home equity loan and HELOC. A second mortgage means you take out an additional loan against your home, in addition to your primary mortgage. You essentially owe two mortgages on the home.
Whether you use a home equity loan or Home Equity Line of Credit, you must have equity available. Otherwise, there is no value in the asset (your home) to borrow against. In general, you can borrow up to 80% equity. If your home is worth $200,000 and you owe $100,000 on your first mortgage, you can borrow up to $80,000.
Just keep in mind that using a mortgage to consolidate credit card debt increases your risk. Converting unsecured debt (credit cards) to secured debt (a mortgage that uses your home as collateral) can be risky. If you fall behind on the payments, you risk foreclosure!
Q: Can you consolidate credit card debt into a refinance?
A: Yes. A cash-out refinance is where you take out a new mortgage on your home for an amount that’s higher than the balance on your existing mortgage. You receive the difference in cash and can use the money to pay off your credit cards.
Again, anytime you convert unsecured debt to secured, you increase your financial risk. This option should only be used after you’ve exhausted all other options. Even then, make sure to consult with a HUD-approved housing counselor so you can accurately assess the risk.
In most cases, you don’t want to refinance your mortgage solely to pay off credit card debt. but if you want to refinance for a different reason and you have extra funds, there’s nothing wrong with paying off a few credit card balances!
Q: Can you consolidate credit card debt with bad credit?
A: Yes, but you are limited to one option for consolidation. You can consolidate debt with a debt management program regardless of your credit score. Even if your score is below 500, you can qualify for this option. The only eligibility requirement is that you have income available to make the monthly payments.
What’s more, if your credit score is extremely low, then a debt management program can help improve it. Since your creditors agree to the adjusted payment schedule, you build positive credit history on all your accounts as you make payments. Credit history is the Number One factor used to calculate credit scores. As a result, many people who successfully complete the programs say their credit improved.
Q: Can you consolidate student loans and credit card debt?
A: In some cases, yes. But you usually don’t want to do so. Here’s why…
You can pay off a student loan with a balance transfer credit card, but it usually won’t help you. The interest rate on the credit card will be much higher once the 0% APR period ends. So, you can increase your rate instead of decreasing it.
The same is true of a credit card debt consolidation loan. The government offers low interest rates on student loans. For instance, the rates on Direct Loans for undergraduates for 2017-2018 is just 4.45%. Even private lenders tend to offer lower rates on student loan products.
This means you usually can’t benefit from interest rate reduction if you try and combine the two types of debt together. A lender won’t let you consolidate credit card debt at a student loan rate. If you go the other way, you increase the rate on your student loans, making them more expensive to pay off.
There’s also an issue if you end up in bankruptcy court. Credit card debt can be discharged through bankruptcy. Student loans cannot, even if they are from private lenders. So, what happens if you put the two debts together and then filed for bankruptcy? The court may decide that the consolidate debt cannot be discharged. As a result, you’d still owe the full amount.
You cannot include student loans in a debt management program.
Q: Can you consolidate your spouse’s credit card debt?
A: This really depends heavily on the situation. In general, you could only consolidate a spouse’s credit card if they cosign the consolidation solution. So, if you get a balance transfer credit card or consolidation loan together, you can pay of each partner’s debt.
You usually can’t pay off someone else’s debt if you apply individually. For instance, when you apply for a debt consolidation loan, the lender will require a list of the accounts and current balances you wish to pay off. They won’t approve paying off someone else’s balance.
However, there is a slight loophole. If you receive the funds from a consolidation loan, HELOC or cash-out refinance, you can use them however you want. So, for example, if you have money leftover once you pay off your debts, there’s nothing stopping you from paying off your spouse’s balance.
Still, in many cases, lenders require direct disbursement when you consolidate. This means they send the money directly to all the creditors you listed during underwriting. In this case, you don’t receive the money yourself to use as you please.
With a debt management program, your spouse must enroll with you if you want to consolidate cosigned debts. You can’t include a spouse’s individual debt in your program. They would need to set up their own debt management program.
Q: Can you use debt consolidation for a car and credit card?
A: You can, but you may not want to do so. Like student loans, auto loans tend to have much lower interest rates than credit cards. The debt is secured using your vehicle as collateral. That means the interest rate is much lower than rates for unsecured debt. This means that trying to consolidate an auto loan with credit card debt would usually increase the rate on the auto loan.
Of course, there can be reasons to do it that a specific to your situation. If you applied for a car loan with bad credit, you may have a high interest rate on your auto loan. In this case, consolidation now that you have a good credit score might be beneficial. Consolidation could also be a way to eliminate a bill if you don’t have much left to repay on the auto loan.
Q: Does consolidating credit card debt hurt your credit score?
When done correctly, the answer should be no. At worst, consolidating debt should have a neutral effect on your credit. That means it doesn’t increase your score, but it doesn’t hurt it either.
In most cases, consolidation should improve your score when done correctly. When you consolidate, you:
- Build positive payment history by repaying the debt
- Avoid credit damage caused by missed payments and debt collections
- Improve your credit utilization ratio by eliminating your balances
You improve the two biggest credit scoring factors – credit history and utilization. Utilization measures how much debt you have versus your total available credit limit. Lower is always better and anything below 30% is good. Paying off debt through consolidation improves your utilization.
Still, there are ways that consolidation can hurt your credit score. If you don’t keep up with the payments, you damage your score. If you start charging again before you eliminate the debt, your utilization ratio goes up, instead of down.
Even a debt management program shouldn’t damage your credit. However, there are a few ways it can. This usually happens during enrollment. After you set up the repayment plan, the counselors negotiate with your creditors. Each creditor must sign off before you can start the program. During that time, you must continue making minimum payments. If you don’t, the missed payments affect your credit.
There is also some risk of decreasing your score when your accounts are closed. Closing credit card accounts increases your utilization ratio because you have fewer credit limits. You may also close your oldest accounts, which decreases your “credit age.” This isn’t the biggest factor in FICO credit scoring, but it can affect you.
If you see your credit score decrease after consolidation for any reason, don’t panic! Just take steps to build credit.
Q: Should I consolidate my credit card debt or settle it?
A: This depends on the status of your debts. One of the primary goals with debt consolidation is to reduce or eliminate interest charges. But debt collectors can’t apply interest charges – consumer rights protections (i.e. federal law) actually prevents them from doing this.
This means if most of your debts are charged off and in collections already, you may not benefit as much from consolidation. In this case, the better option is to settle. Multiple charge-offs and collection accounts mean your credit score has already suffered. So, you don’t need to worry as much about the credit damage that settlement can cause.
That being said, if you don’t want your credit score hurt, you should consolidate.
Q: What happens when you consolidate credit card debt?
A: If you use do-it-yourself consolidation solutions like balance transfers or consolidation loans, then you pay off your existing debts. You effectively take on a new debt to pay off your existing debts. As a result, the balances on your existing debts instantly drop to zero. The accounts are still open, active and in good standing. That means you can still use them to make charges. Just be careful not to run up your balances again!
With a debt management program, you simply set up a repayment plan with your existing creditors. You still owe them, although you make payments through the credit counseling agency that set up your program. As you make the monthly program payments, you can monitor your credit card balances and watch them fall to zero. During this time, the accounts are frozen. You can’t use them and you can’t open new accounts until you complete the program.
Q: What is the best company to consolidate credit card debt?
A: If you need professional help to consolidate credit card debt, always go for nonprofit consumer credit counseling. There are for-profit credit counseling agencies, but they charge higher fees than what we list in the fee caps on this page. In addition, for-profit agencies won’t tell you if there is a better solution available to consolidate.
Nonprofit credit counseling agencies are required to provide a free debt and budget evaluation when you first contact them. They must review all options available and help you identify the right one to use in your situation. So, if you’d be better off using a debt consolidation loan, they’ll tell you that. A for-profit agency won’t. Thus, you should contact a nonprofit consumer credit counselor to get unbiased advice.
Q: What is the best credit card to consolidate debt?
A: Look for balance transfer credit cards. You should compare credit cards online to find the card that offers the best deal. You want a card with:
- No annual fees
- The longest 0% APR promotion period possible
- A low APR for balance transfers, in case you still have debt left at the end of the promotion period
Also keep in mind that some credit issuers won’t transfer debt from one of their own cards. So, if you have a balance on an ABC credit card already, you can’t transfer it to an ABC balance transfer card. They’ll take the balances from PQR and XYZ issuers, but not their own. Check with the issuer before you get a balance transfer card to see if this policy would affect you.
Q: What is the best loan to consolidate credit card debt?
A: There are several things to consider when looking for the best loan to consolidate credit card debt:
- You want the lowest interest rate possible.
- You need a term that provides monthly payments you can afford.
- Avoid loans that place restrictions on repayment, such as early repayment or prepayment penalty fees.
The best idea is to go online and use an online lending comparison tool to shop for multiple quotes at once. You’ll instantly get several quotes. Call each lender to ask for more details:
- Is there a minimum credit score needed to qualify?
- Are there any loan origination fees you’ll need to pay? If so, is there a way to get them waived?
- Are there any early repayment or prepayment penalty fees?
- What’s the maximum term the lender will offer?
- Do they offer any signup bonuses that reduce the APR, such as signing up for AutoPay?
Remember to only ask for quotes! If you go through the formal application process with any lender, you authorize a credit check. You only want one credit check when you consolidate. If you authorize multiple checks by applying for more than one loan, you can hurt your credit score.
Q: When should you consolidate credit card debt?
A: The ideal time to consolidate credit card debt is any time before you start to miss payments. If you’re not struggling to keep up yet, then consolidation is beneficial if it will take more than 6-12 months to repay everything you owe. If it will take over a year to pay off all your balances, then consolidating is wise to reduce or eliminate interest charges. This will allow you to pay off your debt faster and reduce total costs.
If you’ve been putting consolidation off, just don’t wait too long! Once you start to miss payments, you damage your credit score. This limits the options you have available to consolidate. If you see that you’re starting to struggle to keep up with your payments, act now!
Here are some helpful signs that it’s time to consolidate:
- You’re juggling other bills.
- You put off expenses, like doctor visits or car repairs, because your bills take too much income.
- Your minimum credit card payment requirements take up more than 10% of your income.
- You’ve run your credit cards up to their limits.
- You’re considering “alternative financing solutions” like payday loans.
Once you start to miss payments, you can still consolidate. However, missed payments mean credit damage and a lower credit score limits your options. Still, consolidation is still a viable solution because interest charges still accrue on your debt. In this case, a debt management program may be your best option to consolidate.
If your debts are already at charge-off status because you missed payments for 6 months, then it may be too late. Creditors sell accounts to collectors once they are charged off. No interest charges apply after that point. So, you lose one of the main benefits of consolidation.
Still have questions about credit card debt consolidation? Talk to a certified consumer credit counselor for free to get the answers you need!
Article last modified on June 8, 2018. Published by Debt.com, LLC . Mobile users may also access the AMP Version: Credit Card Debt Consolidation: Everything You Need to Know - AMP.