How, Why, And When Should I Consolidate My Credit Card Debt?

Credit card debt can be financially draining and emotionally stressful. If you’re struggling with credit card debt, credit card debt consolidation can offer a lifeline, savings, and a pathway to living debt-free. 

Read this guide to understand how to consolidate credit card debt, why it’s often a good idea, and when to consider doing it. We also share some of the common pitfalls and pros and cons you should consider before you get started with credit card debt consolidation.

How To Consolidate Credit Card Debt

You have a few credit card debt consolidation options, including using a 0% APR balance transfer credit card or taking out a debt consolidation loan. Consider enrolling in a debt management program or consulting a bankruptcy lawyer for serious credit card debt.

Assess Your Credit Card Debt and Credit Score

Before you get started with credit card debt consolidation, get a clear snapshot of your debt situation. Make a complete list of your credit cards with balances, interest rates, and minimum monthly payments, then calculate how much debt you need to consolidate. 

Knowing your card interest rates can help you compare what you’re paying to the interest rates of available debt consolidation products, and you can also compare your minimum payments to what you’d pay monthly using a balance transfer card or debt consolidation loan.

You should also check your credit score so you know where you stand. Your credit score will come into play as you qualify for a credit card or loan. The better your credit score, the better your loan terms and interest rates.

If you’re overspending, understand that a debt consolidation loan probably won’t help you get out of debt. Instead, you’ll need to reduce your spending or increase your income.

Make a budget to know how much you can comfortably spend to pay off your debt.

Hot Tip:

Negotiating interest rates is a good option if you don’t have enough debt to warrant consolidation. Learn how in our guide.

Consider These 2 Options

The best ways to consolidate credit card debt are with a 0% APR balance transfer card or a debt consolidation loan:

• Balance Transfer Credit Card: You can transfer your credit card balances up to your balance transfer card’s credit limit. You’ll pay no interest during the introductory 0% rate period, usually about 12 to 18 months. However, you’ll generally pay a 3% to 5% balance transfer fee upfront.
• Debt Consolidation Loan: Generally offered by a bank, credit union, or online lender, personal loans for debt consolidation are installment loans. These generally have a fixed interest rate and repayment term, making it easy to budget, though you shouldn’t expect a 0% loan offer. You may also get more time to pay with a debt consolidation loan, with loan terms often ranging from 2 to 7 years.

Hot Tip:

A balance transfer card such as the Chase Freedom Unlimited^® can give you 12 to 15 months to pay your credit. See our recommendations for the best personal credit cards for 0% APR balance transfers.

You have other options for credit card debt consolidation, but these are generally less ideal than a balance transfer card or personal loan for debt consolidation:

• Home Equity Loan or Line of Credit: Home equity loans or HELOCs allow you to borrow against your home’s equity, which you can use to pay off credit card debt. While these loans generally offer lower interest rates than personal loans, you’ll use your home as collateral. That means if you don’t make payments on your loan, you could lose your home, which is a risky move.
• Retirement Account Loan: Like a home equity loan, a retirement account loan or 401(k) loan borrows against an asset — your retirement funds. You may get a reasonable interest rate, but it’s risky to gamble your retirement on credit card debt consolidation.

If your credit card debt is seriously out of control and you can’t find a suitable solution with a balance transfer credit card or loan, you may need to consider credit counseling or bankruptcy:

• Debt Management: Credit counselors usually offer a debt management plan to help you get your bills back on track, negotiating with your creditors for reduced or waived finance charges or fees while the agency makes payments on your behalf. While debt management plans can be a legitimate option, this industry is full of scams and risky advice, so you should only work with certified nonprofit credit counselors.
• Bankruptcy: Filing for bankruptcy may be a tough pill to swallow, but in some instances, it can be less painful than letting bad debt drag on for years, even decades. If your credit card debt is beyond help from 0% APR balance transfer credit cards, loans, or credit counseling, talk to a bankruptcy lawyer about your options. You might get your credit back on track faster than you’d think.

Benefits of Consolidating Credit Card Debt

Consolidating credit card debt can offer financial benefits, including lower interest rates, simplified repayment, and faster debt repayment. You can get control of your debt, improve your credit score, and reduce financial stress.

Lower Interest Payments

Debt consolidation should lower your interest rate on credit card debt, whether you get a 0% APR balance transfer card or a debt consolidation loan. With a 0% APR balance transfer credit card, you won’t pay interest if you pay the balance before the promotional rate expires — often 12 to 18 months. 

A debt consolidation loan, usually a personal loan, will charge interest, but you’ll save if the interest rate is lower than what you pay on your credit cards.

Let’s do the math on a couple of interest-saving scenarios for credit card debt.

Let’s say you have $10,000 in credit card debt at a fairly average 20% APR. If you want to pay it off in 12 months, you’d need to make a $926 monthly payment and would pay $1,116.14 in interest fees.

Let’s look at the interest savings if you open a new balance transfer card with a 12-month 0% introductory rate. If you make a $834 monthly payment, you’ll be debt-free in 12 months and pay no interest. That’s a savings of about $100 per month.

Maybe you need more time to pay down your credit card debt. Debt consolidation loans often have terms between 2 to 7 years. Assuming an average personal loan interest rate of 18%, you could pay $499 per month for 2 years and pay $1,982 in interest.

Hot Tip:

Consider whether a credit card or personal loan is a better option in our detailed guide.

Simplified Repayment

Aside from interest savings, you can benefit from streamlined repayment using credit card debt consolidation. If you have multiple credit cards with balances, keeping up with multiple due dates and deciding whether to pay the minimum balance or chip in some more can be intimidating. You might not be sure which credit card debts to pay off first.

When you consolidate credit card debt, there’s no uncertainty. Your plan is clear, with a fixed monthly repayment and a single due date. That can take a lot of stress and management out of dealing with debt.

Accelerated Debt Repayment

In the interest savings examples we shared, there’s not much difference in the timing, but there is a difference in how much interest you’ll pay. Still, fee avoidance is often overlooked in debt consolidation and can help you speed through debt repayment.

If you’re struggling to keep up with credit card payments, chances are you’re facing late fees, returned payment fees, and penalty interest rates that arise from missed or late payments. When you set a manageable plan with debt consolidation and stick to it, you can stay on top of your payments and avoid these fees that add to the cost of your debt and get in the way of becoming debt-free.

Improved Credit Score

As you repay your credit card debt, your credit score should increase. This can happen whether you’re using a balance transfer card or getting a debt consolidation loan. 

Your credit score can temporarily suffer when you open a new credit card because your credit report will get a hard inquiry hit, and the new account can drag down the average age of your accounts. And if you’re using 30% or more of your balance transfer card’s credit limit to consolidate credit card balances, your credit score may drop further with high credit utilization.

Sounds terrible, right? But stick with us here because it’s worth it. The good news is your credit score will soon improve, assuming you stay on track with payments.

As you make payments on your balance transfer card, you’ll help your credit score in 2 ways: with on-time payments and reduced credit utilization. 

Payment history is the most important factor of your FICO credit score and counts for 35%. So, when you make payments consistently every month, you can improve your credit score. Credit utilization is the second most important factor, which makes up 30% of your credit score. As you pay down your balance, you’ll lower your credit utilization and improve your credit score, both good moves for your credit score.

With a debt consolidation loan, you may see a more immediate improvement in your credit score. A debt consolidation loan can help your credit score in 3 ways: payment history, reduced credit utilization, and credit mix.

If you’re staying on top of your debt consolidation loan payments — ideally set at an amount you can manage each month — you’ll help the ever-important payment history factor. And because loans don’t count toward the credit utilization factor, you can improve your score once you move balances from credit cards to a loan.

Further, a debt consolidation loan can improve your credit mix factor, which accounts for 10% of your credit rating. An installment loan, such as a debt consolidation loan, can add variety to your credit report and demonstrate responsible use of various credit types.

Reduced Stress

While running the numbers and seeing how you can benefit from credit card debt consolidation is easy, don’t discount the psychological relief of getting on the path to debt freedom. 

Juggling credit card due dates, minimum payments, paying interest on interest, and dealing with late payments and collection calls can really wear on you. While you can’t walk away from credit card debt, you can streamline it with credit card debt consolidation and put those worries behind you. Instead of getting stuck on the treadmill of credit card debt, you can have a plan with a clear end date when you’ll be debt-free.

Hot Tip:

See why credit card debt forgiveness and debt settlement aren’t great options in our detailed guide.

Timing Your Debt Consolidation Is Important

Credit card debt consolidation can offer tremendous relief, but it’s not for everyone, and there is a right and wrong time to do it. If you’re paying off your credit card bills each month, credit card debt consolidation probably isn’t for you. If you have a small debt load you could probably pay off in 6 months or so, negotiating interest rates and aggressively paying down the balances could be the better option.

But on the other end of the spectrum, you might hit pause before you do debt consolidation if your credit score is too low to get a good balance transfer card or personal loan. Still, credit card debt consolidation is generally worth it if you’re stuck paying credit card interest regularly.

These are some situations when credit card debt consolidation can help you:

• You’re Paying High Interest Rates: It’s best to avoid credit card interest entirely, especially if your credit cards have high interest rates that can add to your debt even more. Credit card debt consolidation can reduce or eliminate interest charges.
• You Regularly Carry Credit Card Balances: Unless you have a 0% interest offer, you’ll pay interest whenever you carry a balance on your credit cards. It’s best to pay your credit card bill in full each statement period, and if you can’t, that’s a sign you should consider credit card debt consolidation that can make payments more manageable.
• You’re Struggling To Maintain Multiple Credit Cards: Handling multiple due dates and payment amounts can be overwhelming and put you at risk of missed or late payments. Credit card debt consolidation can streamline various credit card payments into one that’s easier to remember.
• You Have Trouble Making Minimum Payments: If you can’t keep your head above water on credit card minimum payments, credit card debt consolidation can provide some relief with interest savings and potentially spread payments out over a longer period with a fixed amount each month.

Hot Tip:

Credit card debt consolidation can help if you’re struggling, but you’ll have to get approved for a balance transfer credit card or loan. If your bad credit is a barrier to approval, it may help to take a few months to focus on improving your credit score before you pursue credit card debt consolidation. With a better credit score, your chances of approval are better, and you can access better terms.

Mistakes To Avoid When Consolidating Card Debt

You can see significant benefits from credit card debt consolidation, but be careful not to make the wrong move. These are some pitfalls to avoid:

• Accumulating More Debt: You’ll only drive yourself further into a hole of debt if you clear credit card balances with debt consolidation and then run up new balances on your credit cards again. Then, you’ll have credit card balances plus your old credit card debt payment. You may find it helpful to close or freeze credit card accounts if you’re worried you’ll return to old habits.
• Not Budgeting a Manageable Payment: Credit card debt consolidation is supposed to help you pay less each month, making payments on your credit card debt easier. But if your monthly debt consolidation payment is too high, you risk defaulting on your credit card or loan. Look at your budget first to determine what you can afford to pay monthly for credit card debt consolidation.
• Missing Payments: You’ll face steep penalties and fees if you don’t keep up with your credit card debt consolidation payments. If you miss a payment on a balance transfer card, you could lose your 0% promotional rate and have to pay late fees and penalty interest. Missed payments on a debt consolidation loan can lead to default and potential loss of your collateral.
• Not Addressing Overspending: Debt consolidation can offer a lifeline if you’re struggling with debt, but it doesn’t necessarily address what led to credit card debt. If you’ve struggled with overspending, make sure you’re ready to change your habits so you don’t create more credit card debt.
• Not Planning for Emergencies: You should build an emergency fund of 2 to 6 months of living expenses — or really, whatever you can afford to save — so you’ll be less likely to rely on credit cards when faced with an unexpected expense.
• Not Getting Professional Help: If you have severe credit card debt, don’t try to handle it alone. Talk to a nonprofit certified credit counselor who can help you understand your options and create healthy financial habits with you.

Pros and Cons To Consider

Credit card debt consolidation can offer financial relief and get your credit back on track, but some options are risky, and nothing is free. Your credit score may dip before it gets better, but you must stay on track to avoid the pitfalls of credit card debt consolidation.

Pros

• Accelerated debt repayment
• Improved credit score
• Lower interest payments
• Reduced financial stress
• Simplified repayments

Cons

• Balance transfer fees
• Credit score impact
• Loan interest and closing costs
• Potential collateral risk
• Risk of accumulating new debt

Final Thoughts

While credit card debt consolidation can help you navigate your way out of high-interest credit card debt, it’s not a one-size-fits-all solution. You’ll need a clear understanding of your financial situation and should make an informed decision about your debt consolidation options.

Credit card debt consolidation offers tremendous advantages, including lower interest payments and streamlined repayments that can ultimately get you out of debt faster. Still, it’s wise to avoid the pitfalls of debt consolidation, like missing payments or taking on an unmanageable payment plan that could hinder your progress and worsen your financial situation.

Read our guide to find out more information on how to consolidate credit card debt without hurting your credit.