Making the decision to pay down your debts is one of the best actions you can take to improve your overall financial health. But there are different types of debt, and each has associated methods that are more effective than others when your goal is to pay off what you owe. If you have credit card debt — like multiple cards with different balances, payments and interest rates — credit card consolidation is a strategy that can help you take charge by paying off your debt in less time while potentially saving some money.
But, first things first. Before you get started, it’s important to learn what the process of card consolidation looks like, how it works and how it can make your credit card bills more manageable. Take a look through this introductory guide to learn more about your options.
How Does Credit Card Consolidation Work?
Credit card consolidation is a financial strategy that involves combining all of your credit card balances into a single monthly payment. All credit card consolidation methods follow the same general process. First, you calculate all your credit card balances. Then, you apply for a new credit product and use that to pay off all your existing credit card balances. This leaves you with a new credit amount that has a single monthly payment (and, often, a lower interest rate that what you were paying on your individual cards).
This strategy is effective when you’re paying high cumulative interest across multiple credit cards — it’s likely not one you’ll utilize if you have one or two low-interest cards with manageable balances. When you combine your debts into a single monthly payment, credit card consolidation can usually help you lower your interest costs. It also makes managing payments more convenient; as long as you don’t use the cards whose balances you just paid off, you’ll only have to schedule one payment per moth. In the end, successful credit card consolidation can also help you pay off your debt faster.
What to Consider Before Choosing a Credit Card Consolidation Method
Because there are many ways to consolidate your credit, there are several key factors to consider before you select the method you’ll use.
Current Debt
Knowing where you stand in terms of your current debt will help you determine which consolidation method to go with. Before choosing a method, look up all the monthly payments on all your cards and calculate how long it’ll take to pay them off. Once that’s complete, calculate how much you could save if and when you opt to consolidate your credit cards using various methods.
Credit Score
You should consider your current credit score before choosing a credit card consolidation method. A good credit score can help you access a wider variety of credit card consolidation methods with low interest rates. However, a lower score may restrict you to consolidation options with higher interest rates or methods that don’t require you to provide your credit score when applying.
Current Spending
It’s essential to consider your current spending. Credit card consolidation works best when you’re saving on the overall amount you were paying towards credit card bills. It helps to work out a budget and commit to it. If you increase your spending or start putting more money onto a card you just consolidated, your credit card debt could continue growing.
5 Methods to Consolidate and Manage Credit Card Debt
There are plenty of ways to consolidate and manage credit card debt. Each method has different pros and cons, depending on your needs and the factors discussed above. Let’s examine five different options for consolidating your credit cards, highlighting the pros and cons of each method, and explain how to determine if a method is right for your needs.
1. 0% Interest Balance Transfer Credit Card
Balance transfer credit cards work by consolidating all the balances you have on other cards into a single balance on a new credit card. Then, you only need to make a single monthly payment on the new card moving forward.
Depending on the credit company you go with, you may be able to obtain a 0% interest rate on this new consolidated balance for an introductory period. With some cards, there may also be zero annual fees. If you can pay off your debt within the designated time frame, you may be able to save on interest and fees. Using this method is best if you’re currently paying high interest fees.
Keep in mind that if your credit score is on the lower end, you may be charged a higher interest rate, or in some cases, you may not qualify for a new balance transfer card. Some companies may also have hidden charges you should check for, such as balance transfer fees.
2. Credit Card Consolidation Loan
You can also consider applying for a credit card consolidation loan. This is an unsecured loan that normally doesn’t require any type of collateral. Credit unions, banks and online lenders typically offer these types of loans. You’ll want to research their repayment schedules, interest charges and rates, and fees, as these factors can vary widely from one lender to the next.
It makes the most sense to consider this method when you get an offer to pay off your debt over a longer period of time. Keep in mind that the cumulative interest should remain lower than what you’re paying currently toward interest on your existing credit card balances. Additionally, because you’re consolidating all your debts, make sure you’re able to keep up with making the single monthly payment. It’ll be a larger amount that you pay once a month, not several smaller amounts you can spread out between paychecks like you are with current credit card bills.
3. Taking Out a Personal Loan
You may want to look into a personal loan. Unlike a credit consolidation loan that’s specifically designed to help people pay off debt, you can take out a personal loan for a variety of reasons. If you qualify for one with no collateral requirement and lower interest fees, a personal loan is another viable option for consolidating debt.
Deciding whether to take out a personal loan comes back to its financial implications. If the cumulative interest is greater than what you currently pay on your credit cards, then it doesn’t make sense to incur higher costs, even if it is easier to manage a single payment. Moreover, if your credit score is lower, you may qualify for an interest rate that matches or exceeds your current interest on your credit cards.
4. Peer-to-Peer Lending
If taking out a consolidation loan or applying for a balance transfer card doesn’t work for you, you can consider searching peer-to-peer lending websites that match investors to people looking for unsecured loans. However, be aware that these types of loans tend to be for smaller amounts and have shorter repayment periods.
Peer-to-peer lending is a good way to consolidate your credit if you’re confident in qualifying for lower interest rates. This loan type generally requires higher monthly payments and interest rates. These loans take less time to apply for, so they’re worth looking into if you want to avoid the longer wait times that come with processing traditional loans.
5. Credit Counseling With a CFPB-Recommended Agency
You can also consider enrolling in a credit counseling program that’s approved by the Consumer Financial Protection Bureau (CFPB). You can get help by connecting with a credit counselor from the National Foundation for Credit Counseling or the Financial Counseling Association of America.
Credit counselors are experts in navigating the finance industry and helping people manage debt. With their help, you can get a clearer picture of your financial standing and find ways to manage your debt. Most of these counseling sessions take place via phone, online or in person.
Determining if this method is right for you will require thorough research into a credit counselor’s background and qualifications. You’ll also need to calculate the pricing for fees and options available to assess whether it’ll make financial sense for you to hire one.
