Credit card consolidation: What is it and how does it work?
There are different ways to consolidate credit card bills. But the general idea is to simplify finances and save on interest by combining multiple credit card statements into a single monthly bill.
What you’ll learn:
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Credit card consolidation works by taking out a new loan or line of credit to combine multiple credit card bills into one monthly payment.
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Credit card consolidation methods include balance transfers, debt consolidation loans, home equity loans (HELs) and home equity lines of credit (HELOCs).
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Consolidating credit cards may simplify bill paying and potentially lower overall monthly payments.
What is credit card consolidation?
Credit card consolidation is the process of combining multiple credit card bills. The process doesn’t erase credit card debt. But it could simplify payments and reduce interest to help better manage credit card debt.
How does credit card consolidation work?
Credit card debt consolidation involves using a loan or credit card to pay off other credit card balances. Consolidating credit card accounts can reduce the number of monthly payments to manage. And depending on the terms of the new debt, consolidation could offer reduced interest rates.
But the Consumer Financial Protection Bureau (CFPB) says these promotional “teaser” rates may be for a limited time. And there may be fees to consolidate debt.
How to consolidate credit card debt
There are different ways to consolidate credit card debt. What works for each person may differ based on their situation. But here are some common credit card consolidation methods:
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Balance transfers: A balance transfer is the process of moving a balance from one credit card to another.
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Personal loans: Debt consolidation loans are types of personal loans that let you combine multiple credit card bills into one fixed monthly payment.
- Home equity loans and home equity lines of credit: HELs and HELOCs let you borrow against the equity you’ve built in your home.
Pros and cons of consolidating credit card debt
Credit card consolidation has potential advantages and disadvantages to consider before making any decisions:
Credit card consolidation pros
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Credit card debt consolidation can help simplify bill paying.
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Some credit card consolidation loans can help you take advantage of a lower interest rate.
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Finding a low introductory rate for balance transfers can potentially lower your monthly payments.
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You may be able to pay off debt quicker using a debt consolidation loan with a fixed monthly payment.
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There could be benefits to credit scores if consolidation makes it easier to make payments on time. Payment history is the most important credit-scoring factor, according to FICO® and VantageScore.
Credit card consolidation cons
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This process doesn’t necessarily offer a long-term solution for getting out of debt without making other adjustments.
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There may be up-front charges like balance transfer fees, closing costs or loan origination fees.
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Debt consolidation loans don’t always offer interest rates lower than existing accounts do.
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Certain debt consolidation companies may actually be debt settlement companies. The CFPB explains that these companies may charge fees. And they might encourage you to stop paying your credit card bills while they’re negotiating terms.
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According to the CFPB, monthly payments might be lower because loans are repaid over a longer period of time.
Credit card consolidation FAQ
Here are a few common questions about credit card consolidation:
What should I consider before consolidating credit cards?
According to the CFPB, there are a few things to try before applying for a loan or a new credit card to pay off your existing credit card debt:
- Talk to a credit counseling service. A credit counseling service can give you money management tips and advice specific to your situation. This may provide the tools needed to better manage financial obligations in the future.
- Review your spending habits. While finding a solution to pay off credit card debt, it’s helpful to understand how the debt was accrued in the first place.
- Try adjusting your budget. You may be able to pay down credit card debt without a credit card consolidation loan by building a budget that works for your lifestyle.
Are there risks to consolidating credit cards?
There may be risks to any loan if you’re unable to successfully manage it. The CFPB offers an example of why it’s important to budget and fully consider your finances before making any decisions: “Although your monthly payment might be lower, it may be because you’re paying over a longer time. This could mean that you will pay a lot more overall, including fees or costs for the loan that you would not have had to pay if you continued making your other payments without consolidation.”
Does credit card consolidation hurt your credit?
If you’re able to lower your rates or your payments by consolidating, you may be able to pay more of your balance each month, which can be one good way to improve your credit. But it’s important to know that opening a new credit card account to transfer a balance does create a hard inquiry on your credit reports, which might lower your credit scores temporarily.
What are the disadvantages of consolidating your credit card debt?
Consolidating credit card debt won’t eliminate credit card debt or decrease the principal. And sometimes you may have to pay up-front fees. There’s also no guarantee that you’ll get a lower interest rate or better loan terms than what you have with your current accounts.
Key takeaways: Credit card debt consolidation
Consolidating your credit card debt is one way to streamline multiple bills into one. If you can get a lower interest rate than what you currently have, it may reduce your minimum monthly payments.
While credit card consolidation could make managing your debt easier and allow you to pay it off more quickly, a debt consolidation loan or balance transfer isn’t always a perfect fix. Be sure to understand the risks and limits before committing.
