If you have multiple credit cards with high balances, a credit card consolidation loan can potentially make your life easier in several ways. To start, you may be able to access a lower interest rate and a lower monthly payment. Consolidating your credit card debt also simplifies your repayment process by leaving you with only one monthly payment.
Let’s take a look at how to consolidate credit card debt and why you may want to use this debt-clearing strategy.
Credit card debt consolidation is the process of combining multiple sources of credit card debt into one new loan. Consolidating your credit card bills leads to having just one monthly payment, which can make it easier to stay organized.
If you’ve been able to improve your credit score, you may even qualify for lower interest rates than you had on the original sources of debt.
Consolidating credit card debt is often done by using a balance transfer credit card.
Many credit card issuers offer a promotional interest rate for balance transfer cards that makes it possible to benefit from a 0% APR during the introductory period. This means you won’t have to pay interest during that time — usually 12, 18, or 21 months — and can focus on paying down the principal balance before the regular (and usually high) interest rate kicks in.
Typically, you’ll pay a balance transfer fee to consolidate the money you owe. This can be a fixed amount or a certain percentage of the balance you transferred (whichever is more).
It’s also possible to consolidate credit cards and other forms of debt through a debt consolidation loan. When you do this, you’ll apply for a new loan and those funds will be used to pay off your existing debt. Then you’ll focus on paying off the new loan. Debt consolidation loans can also come with introductory offers known as “teaser rates” that will be temporarily lower than the ongoing interest rate.
Related: Learn more about getting a personal loan
It’s important to consider the pros and cons of consolidating credit card debt. If you’re charged a higher interest rate and fees, your debt may end up costing you more, which could make it harder to pay off in full.
Also, keep in mind that consolidating your debt can affect your credit score negatively at first, but can give it a boost in the long run. Applying for a new form of credit leads to a hard inquiry on your credit report and can temporarily knock your score down a bit. However, paying off your debt and making on-time payments can help you improve your credit score over time.
Also, transferring large amounts of debt to a new credit card can result in a higher credit utilization ratio, which is your total combined balance compared to your total credit limit. But as you pay the new debt down, you can improve your ratio and credit score.
If you’re ready to pursue this strategy, follow the three steps below:
- Research your consolidation options. You need to find the best way to consolidate your debt for your financial profile, so research different consolidation options, like balance transfer cards and debt consolidation loans.
- Shop around. You’ll want to compare a few different lenders and the potential rates they’re offering you. The goal here is not just to streamline the debt repayment process, but to save money on interest as well.
- Apply and compare offers. Take both interest rates and fees into account to see which lender can help you save the most money. You’ll also want to compare repayment terms and monthly payment amounts.
Related: Learn more about getting a personal loan
When deciding whether to consolidate your credit card debt, you’ll want to take potential savings into account. You’ll need a good credit score to secure a low interest rate. You also need to make sure you can afford the new monthly payments so you don’t struggle to make your payments down the line.
Having one monthly payment is convenient and can help you avoid late payments, but consolidation is only worthwhile if it will save you money.
Consolidating debt makes the most sense if you can take advantage of a 0% APR introductory offer, which is fairly common with balance transfer cards. See if you can pay off all or most of your debt during that initial period to help make debt repayment more affordable.
Let’s address some common questions about credit card debt consolidation so you have all the facts.
Consolidating credit card debt can both hurt and help your credit. At first, applying for a new form of credit can lead to a hard credit inquiry, which can ding your credit score. That hit is temporary, though, and as you make consistent progress on paying off your debt with on-time payments, you can actually improve your credit score.
While debt consolidation takes multiple forms of debt and consolidates them into one debt, debt settlement is the process of negotiating a lower payoff amount. With debt settlement, a representative from a debt settlement company gets lenders to agree to accept a lump sum payment that’s lower than your total debt amount in exchange for completely paying the debt off.
If you don’t want to consolidate your credit card debt, you can create a budget that focuses on aggressive debt repayment so you can get out of debt sooner and pay less interest overall.