How to Consolidate Credit Card Debt: A Guide to Simplifying Payments

What is consolidation? It is the process of bringing all of your outstanding debts together into one payment per month, preferably with a lower interest rate. According to the Federal Reserve, Americans who have revolving balances on their credit cards pay on average over 21% APR, whereas personal loans for consolidation go up to about 12% on average.

This guide will cover each option available and help you weigh the pros and cons and make an informed choice.

What You Should Know Before You Start

When considering any form of consolidation, you need to take all your credit cards and write down their balances, interest rates, and dates when they are due. This way, you can have an overview of the situation and determine whether you'll make profit by consolidating.

The idea of credit card debt consolidation is that instead of repaying several balances with higher interest rates, you can repay one balance at once. In case consolidation is done correctly, it means that you will not be paying extra interest, and you will know when your debt repayment period ends. If consolidation is done incorrectly, it may mean even more problems in the future.

One detail that should be kept in mind: consolidation will help you deal with the existing debts only. What consolidation won't do is prevent new debt from emerging. In order to stop creating new debts, consolidation needs to be coupled with budget planning.

Your Options for Consolidating Credit Card Debt

Personal loans are the most popular way to go, but that’s not always the case. Depending on your credit, earnings, and total debt amount, one of these alternatives may work better for you.

Balance Transfer Credit Cards

With a decent credit score, a balance transfer credit card at a 0% introductory APR can get rid of any interest payments for 12 to 21 months. Your old debts will be transferred to the new card where they can be paid off interest-free.

However, the downside here is that there is usually a balance transfer fee ranging from 3% to 5%, which is due immediately, and when the intro rate expires, the standard APR rate kicks in, ranging from 20% to 29.99%.

Personal Loans

Personal loans serve as the base of most of the debt consolidation plans. These loans can be obtained from any bank, credit union, or even online lenders. In such cases, the borrower takes a loan, pays off all credit card balances, and repays the borrowed amount in monthly installments for a defined period.

The interest rates can be vastly different for each category. For instance, borrowers who have credit scores over 670 might receive loans in the range of 7% to 15% APR. Individuals with credit scores under 580 should expect interest rates from 20% to 35.99%, which are still cheaper compared to penalty rates on credit cards.

Home Equity Loans

One of the best ways for homeowners to obtain a loan is to borrow money against equity of their property. The major drawback of this type of financing is the fact that the mortgage is backed by an asset; thus, in case of missed payments, foreclosure is possible.

Credit Counseling and Debt Management Plans

Credit counselors affiliated with the NFCC are nonprofit professionals who can work with you directly to lower interest rates and set up a payment schedule. Most of them provide such services free of charge or for low fees.

It is an option worth considering prior to taking out any loans with a high APR, particularly if you have bad credit ratings.

The Snowball and Avalanche Methods

Although they do not constitute consolidation loans, they are genuine ways to handle multiple debts without outside assistance. The snowball technique starts with paying off the lowest balance and allows you to gain fast victories. The avalanche technique prioritizes repaying debts with high interest first. 

None of these requires you to take another loan or apply for credit.

Does Consolidating Debt Hurt Your Credit Score?

In the short run, yes, a bit. The hard inquiry will reduce your credit score by a couple of points, while the opening of the new account will decrease the average length of accounts held.

However, both factors are temporary.

As stated on myFICO website, the hard inquiry will be erased from your credit report within six to twelve months. Moreover, the overall effect of the debt consolidation will eventually be favorable. On-time payments and having a balance of zero on the credit cards will result in lowering the credit utilization ratio, accounting for about 30% of your FICO score. Borrowers notice an improvement in six to twelve months of making timely payments.

When Does Consolidating Credit Card Debt Actually Make Sense?

It is reasonable to consider consolidation when three aspects align: having multiple outstanding debts with high interest rates, being able to get a loan with significantly reduced interest, and being committed to monthly payments.

It is not a good idea if your income is irregular, you started working at a new company, or you are likely to fill your cards again after paying down your debt. It would be wiser to organize your budget first.

Debt Consolidation vs. Paying Off Cards Individually

Not sure if this strategy is right for you? Here's a head-to-head comparison between the two methods.

Consolidation has the edge in terms of simplicity and lower interest and if you're eligible for a lower interest rate. Paying off each individual loan will be a better option for those who prefer autonomy and don’t wish to have a new loan.

The Real Benefits of Consolidating Credit Card Debt

Here are four solid benefits of consolidating credit card debts.

Lower interest costs

That's because most of your monthly payment goes towards reducing the total amount that you owe as opposed to interest payments. Saving even a small amount of interest – from 24% to 16% – on $10,000 will save you $800 annually.

One predictable payment

Removes the confusion associated with managing multiple deadlines. With fewer payments, there will be less likelihood of overlooking one, and missed payments will affect your credit score the fastest.

A faster path to debt-free

Results from the regularity of fixed payments together with low-interest rates. The minimum payment plan of credit cards is meant to stretch your payment for as long as possible. With a consolidation loan, there is an end date.

Credit score improvement

Are easier to attain if you make timely payments regularly while maintaining zero balances on your revolving accounts. Many consumers experience changes in their credit scores within six to twelve months.

Step-by-Step: How to Consolidate Credit Card Debt

Helps you avoid selecting the wrong type of loan or overlooking some critical information that can cost you financially.

Step 1: Map out your debt.

Make a list of all the credit cards including the current balances, interest rates, and minimum payment amount. Determine your total debt amount as well as the average APR. These will give you your starting point

Step 2: Check your credit score.

Access your credit report through AnnualCreditReport.com for free from the three major credit bureaus. Your score will help determine what kinds of loans you qualify for.

Step 3: Pick your consolidation method.

Your credit score, total amount owed, and monthly budget should be the deciding factors for choosing among personal loans, balance transfer cards, home equity loans, and credit counseling programs. The CFPB's advice on consolidating debts is an excellent and free resource for evaluating these solutions.

Step 4: Pre-qualify without impacting your score.

All online lenders will give you a chance to get pre-qualified through a soft credit check that won't hurt your credit. Compare rate offers from multiple lenders to make sure.

Step 5: Submit your application.

Make sure you have your financials on hand. The decision to approve depends on your credit standing and lender's criteria.

Step 6: Pay off your cards immediately.

As soon as your money comes through, pay down all your cards' balances immediately. Make sure you keep proof of this and track your bills for two to three billing periods.

Step 7: Stick to the plan.

Arrange autopay for your consolidation loan and avoid making any new credit card purchases while repaying your loan. This is the step that differentiates the successful borrowers from those who start all over again.

What Makes Debt Consolidation Actually Work

This is only the start of the journey. It all depends on how you repay the loan.

Plan out a realistic budget months before applying for a loan. This way, you will be able to track everything and see if the loan repayment fits well into it.

Use cash or debit for daily expenses while repaying your consolidation loan. If you have paid off your debts, you may want to move your funds away from those high-interest cards and accounts.

Sign up for autopayment. A simple oversight could lead to additional fees and harm your credit. An autopayment system helps you keep your payments consistent without any trouble.

Consider various lenders. You should never settle for the first offer you get. Look for APR under 25% and origination fees less than 5% if your credit is poor. A little bit of time can help you save tons of money in the end.

Frequently Asked Questions

Can you consolidate credit card debt with bad credit?

Absolutely. Online lending platforms, credit unions, and some community banks cater to borrowers with credit scores under 580. You can expect an interest rate range of 20% to 35.99%, along with origination fees ranging from 1% to 8%.  

Secured loan products backed by collateral are usually more favorable. Consider seeking help from nonprofit credit counseling services as a free loan consolidation alternative.

What credit score do you need?

Unsecured personal loan programs normally require a minimum credit score of 580–600. Scores higher than 670 usually ensure low enough interest rates to warrant the consolidation process. Credit unions generally provide more flexibility for members with scores between 560 and 600.

Will applying for a consolidation loan hurt my credit?

Your credit score will likely decrease temporarily due to the loan application's hard inquiry. This change should stabilize within six to twelve months, and timely repayments should positively impact your score during this period.

What's the easiest consolidation loan to get with bad credit?

Personal secured loans and collateral, such as your savings account balance or automobile, represent the most available options. Credit union loan programs are also an excellent choice for current members. Avoid payday consolidation loans with annual percentage rates (APRs) of over 300%..

Is consolidation a good idea if my credit is bad?

It becomes logical for consolidation purposes when the rate offered is lower than the rate currently paid in order to pay off debts. The main thing here is to ensure that the consolidation doesn't increase new debt. In case the rates are more or less similar or the danger is actually present to increase the debt, a repayment plan or even a credit counselor could be better options.

Final Words

Credit card debt consolidation is not a miracle solution; however, it is the most pragmatic option. What matters here is that you go ahead with a well thought-out strategy. First, you need to gather all necessary information, consider the options, secure the lowest possible rate, and start with consolidation. When done correctly, consolidation will enable you to save money, decrease the worry about payments, and get rid of debt.