What You Need to Know About Credit Card Debt Consolidation

Credit card debt doesn’t happen in a vacuum. Millions of Americans across the country have credit card debt — credit card debt is actually over $1 trillion in the U.S. according to the Federal Reserve. However, there are options to help eliminate credit card debt. One of those ways is credit card debt consolidation.

Credit card consolidation is a way to simplify your debt across several credit cards by combining them into one. Rather than making payments on three different credit cards, you will only have to pay one bill. This can reduce the cost of interest and make repayments much more manageable.

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Whether you should use consolidation loans or a new credit card to consolidate your debt will depend on how much debt you have, what type of debt it is and your current financial position.

[ Read: What Is Debt Consolidation and What Are Your Options? ]

In this article

    How to consolidate your credit card debt

    Option one: Apply for a balance transfer credit card

    One of the first approaches to consolidating your credit card debt is to apply for a balance transfer credit card. Many balance transfer cards will offer intro interest rates of 0% for the first six to 18 months. If you can repay the balance within the intro period, you can avoid interest rates altogether.

    Option two: Apply for a debt consolidation loan

    This is usually an alternative to the balance transfer credit card if you are not accepted for one of those. Personal loans for credit card consolidation won’t come with intro rates, but you can still get lower rates than your current debt. This method can also be used to pay off other loans you may have in addition to credit card debt.

    Option three: Use your home equity

    This is only an option for homeowners who have a high amount of home equity. Home equity can be used to pay off current debts through a home equity loan or a home equity line of credit (HELOC). Another way is through a cash-out refinance loan. Using home equity has the benefit of lower interest rates than regular personal loans because they’re secured loans. However, your home is at risk if you default on your loan.

    [ Next: Consider These 3 Things Before Getting a Home Equity Loan ]

    Credit card debt consolidation for bad credit 

    Can someone with poor credit consolidate their credit card debt? When the options available include taking on more debt, this makes things difficult for people with bad credit. However, it’s not impossible.

    [ More: How to Get a Loan With Bad Credit ]

    The first step is to get a good idea of your credit score and research lenders who specifically help those with bad credit. For example, lenders such as Avant, NetCredit and LendingPoint all offer loans for borrowers with bad credit. Just be aware that interest rates may be higher, and you may not be able to take out a large amount of credit.

    Pros and cons of credit card debt consolidation 

    Pros

    • Fixed interest rates. One of the pros of credit card consolidation loans is that credit cards usually have variable APRs. With a credit card consolidation loan, borrowers typically receive a fixed APR, making monthly payments predictable and easy to budget for.
    • Low interest rate. Credit card consolidation often comes with low interest rates. In some cases, you may even be able to get an intro offer for a balance transfer card with 0% interest. This will depend on your credit score, though.

    Cons

    • Borrowers with bad credit will struggle to get low rates. If your credit score is poor, you may not be able to save much on interest rates because you will only be offered high rates.
    • Impact on your credit score. Whether you use a new credit card or a personal loan to consolidate your debt, applying for a new one will cause a blip on your credit score. The good news is that this is usually temporary and it will recover if you use the new loan or credit card correctly.

    Is a personal loan the best option for credit card debt consolidation?

    A personal loan is one of the most common methods for debt consolidation for a few reasons. A personal loan can be used to consolidate debt from both credit cards and other types of personal loans, making it the better option for those with both types of debt. It’s also a good alternative if you get turned down for a balance transfer credit card.

    [ Read: 6 Tactics for Handling Piles of Credit Card Debt ]

    Alternatives to a credit card debt consolidation loan

    Snowball method

    The snowball method is a debt reduction strategy that works by paying off debt from smallest to largest. You start with your smallest debts, pay them in full and then work your way through the next few, gaining momentum each time a debt is cleared. With this method, you start slow, but once your finances are freed up from having to pay the smaller debts, you can pay off the bigger ones faster.

    To do this, list down all your debts from smallest to largest. Make the minimum payments on each debt but increase your repayments as much as you can on the smallest. Simply repeat this on each debt until you pay off your last one.

    Avalanche method

    The avalanche method uses a similar strategy, but instead of focusing on the smallest debt first, you start with the debt with the highest interest rate first. With the avalanche method, you must still make your minimum payments on your other debts, but try to increase how much you repay on your debt with the highest interest. This will help you save money by limiting the amount you’re spending on interest overall.

    Reorganize your budget 

    Another alternative to opening up new loans or credit cards is to reorganize your budget to clear your debt more effectively. This is perhaps the simplest yet hardest method for many. It will require a thorough look into your finances and will involve making cutbacks on unnecessary items to pay off your debts faster. This method can be paired with a strategy such as the snowball or avalanche method for more focus.

    [ Read: 11 Ways to Get Out of Debt Faster ]

    How credit card debt impacts your credit score

    Credit card debt can impact your credit score in a few ways. Firstly, taking out a new card can cause a blip on your score. Then there’s also credit utilization and late payments to think about.

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    Credit utilization means the proportion of available credit taken on as debt. For example, a $1,000 credit limit with only $100 spent is 10% credit utilization. If you have maxed out your credit card, this is a high utilization rate which reflects badly on your credit score. If you have made several late payments or are making just the minimum, this can also damage your score as credit card issuers will report late payments to the credit bureaus. Debt consolidation can help to repair it by making the debt more manageable.

    We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

    Kara Copple

    Contributing writer

    Kara Copple is a writer who specializes in business, finance and marketing industries.

    Reviewed by

    • Courtney Mihocik
      Courtney Mihocik
      Editor

      Courtney Mihocik is an editor at The Simple Dollar who specializes in insurance, personal finance, and loans. Previously, she wrote and edited for Interest.com, PersonalLoans.org, Ballantyne Magazine, Thread Magazine, The Post, ACRN, The New Political, Columbus Alive and the Institute for International Journalism.