What Is Credit Card Consolidation?

Credit card consolidation allows you to combine all of your credit card debts into one monthly payment. The main advantage of consolidating credit card debt is that it can save you money, especially if you qualify for a much lower annual percentage rate (APR).

However, before you consolidate your credit card debt, it’s a good idea to learn how it works, ways to combine your balances, and the pros and cons.

Compare personal loan rates

How does credit card consolidation work?

Consolidating your credit card debt means taking out a new loan to pay off your current credit card debts.

Keeping track of repayment dates on your credit cards can be challenging. However, If you take out a personal loan to consolidate, you’ll only have one monthly payment. In addition, you may save hundreds or thousands of dollars if you qualify for a lower APR.

Let’s say you have $18,000 of credit card debt spread across multiple cards. If you qualified for a 48-month personal loan at 20% APR and used the funds to consolidate your credit card debt, your estimated monthly payment would be $548, and the total interest paid over the life of the loan would be $8,292. As a result, you would pay less in total interest versus not consolidating and continuing to pay your credit card balance over the same four-year period.

Use a personal loan calculator or credit card consolidation calculator to see how it works.

Types of credit card consolidation

You can consolidate your credit card debt using various financial products. Comparing the pros and cons of multiple options can help you determine the best one for you.

1. Balance transfer credit card

If you have good to excellent credit, you may qualify for a balance transfer credit card. These cards come with low- or no-interest promotional periods that can last up to 18 months or longer. You can save a lot of money if you pay your credit card debt during this time period, but there are some cons to keep in mind.

“When doing a balance transfer, be mindful of balance transfer fees,” said Carla Blair-Gamblian, credit expert at Veterans United Home Loans. “Also, try to pay off the balance in full before the promotional period expires. Otherwise, you’ll have to pay the card’s standard APR on any remaining balance, which is generally high.”

2. Debt consolidation loan

You can use a type of personal loan called a debt consolidation loan to pay off your outstanding credit card balances. Afterward, you’ll only be responsible for one monthly payment at a fixed interest rate.

You can get one from various places, including banks, credit unions, and online lenders. You may qualify for a lower rate than your average credit card debt if you have good to excellent credit. According to the Federal Reserve, the average interest rate on credit cards was 21.37% APR. The average interest rate on a two-year personal loan was 11.66%, more than nine percentage points lower.

But a downside is that some lenders charge origination fees, which can increase the total borrowing cost of the loan.

Comparing rates, fees, and repayment terms across multiple lenders can help you find the consolidation loan that best suits your needs.

3. Home equity line of credit (HELOC)

This is a revolving credit option that allows you to borrow against the equity in your home on an as-needed basis. Since the lender requires you to pledge the equity in your home as collateral, it usually comes with a lower APR than credit card debt. HELOCs usually come with variable APRs — the interest rate fluctuates based on economic conditions.

The main downside of a HELOC is that if you default, the lender can foreclose on your home. So, before you decide to consolidate credit card debt with this option, make sure you can comfortably afford to repay what you borrow.

4. Debt management plan

If you need assistance creating a plan to eliminate your debt, consider contacting a government-approved credit counseling agency. These agencies help you create a debt management plan to pay off your debt in three to five years in exchange for a monthly fee.

A major pro is that a credit counseling agency might be able to negotiate a lower rate and monthly payments with your credit card issuers. And unlike debt settlement, a debt management plan doesn’t harm your credit.

However, a potential downside is that an agency may require you to agree not to open new credit accounts while in the plan.

Other strategies to pay down credit card debt

Credit card consolidation can potentially save you money and help you better manage payments, but it’s not the right move for everyone. Consider using these other strategies.

• Create a budget. A budget can help you free up cash to put toward paying down credit card debt. To create a simple budget, write down your expenses and monthly income. Afterward, look through your list to see if you can trim any unnecessary expenses.
• Analyze your spending habits. Review your credit card statements and bank account to identify areas where you may be overspending each month.
• Ask creditors for lower monthly payments. If you can't afford to pay your credit card bills, contact your creditors to ask them to temporarily reduce your monthly payments.