What Is Credit Card Debt Consolidation?

Find out how to consolidate credit card debt and whether it’s a good idea.

By , J.D., California Western School of Law
Updated by Amy Loftsgordon, Attorney · University of Denver Sturm College of Law

If you're struggling to pay off multiple credit cards, consolidating your debt might allow you to reduce your interest rate and lower your monthly payments. But consolidating debt isn't always the best option.

While consolidation does offer relief by putting your bills into one monthly payment, you might not qualify for a low interest rate, and you might have to pay fees. It also doesn't address the problem that got you into debt in the first place. Whether you should consolidate your credit card debt depends on your circumstances and the terms of the consolidation.

In most cases, you should only consider credit debt consolidation after exhausting all other options.

What Is Credit Card Debt Consolidation?

"Consolidating" your credit card debt essentially means combining all of your debt into a single loan or paying your creditors through a single monthly payment. By consolidating, you might be able to get a lower interest rate, reducing your monthly payment and the total amount you'll have to pay.

If you're able to consolidate at a lower interest rate, you might be able to get out of debt faster by putting the money you saved on interest toward paying off your debt.

How to Consolidate Credit Card Debt

When you take out a credit card consolidation loan, you use the loan proceeds to pay off all of your outstanding credit cards. So, instead of owing money on multiple cards, you'll have a single obligation. You'll pay one lender rather than many creditors.

The amount of your monthly payment will depend on the total amount you borrow, the interest rate, and the payment terms of your consolidation loan.

How Does Credit Card Debt Consolidation Work?

You can consolidate your debts with an unsecured personal loan, secured loan (like a home equity loan), or balance transfer credit card.

Unsecured Consolidation Loans

Some finance companies, bank subsidiaries, and similar lenders make unsecured consolidation loans. These companies lend you money without requiring that you pledge any property as a guarantee that you'll pay. If you have good credit scores, consolidating your credit card debt might be a viable strategy for paying off the debts.

But consolidation loans aren't without problems. The interest rate on these loans can be astronomical, especially if you don't have good credit, often reaching 36% or more. Lenders also might charge fees, which can bring the effective interest rate closer to 50%. Even if you get a good promotional introductory rate, the rate could go up over time.

Depending on the loan terms, you might have to pay the debt for longer than you would be otherwise and possibly pay more interest than if you'd stayed with the original creditor. Also, getting this kind of loan doesn't help you change the spending habits that got you into debt trouble in the first place.

Secured Consolidation Loans

Other finance companies and bank subsidiaries offer secured consolidation loans. If the loan is a secured consolidation loan, you have to pledge your house, car, or other personal property as collateral. These loans are like second mortgages or secured personal loans: You'll be charged interest at a rate of about 7% to 36% (or more), depending on your credit rating and the security.

If you default on the loan, the lender can take the property you used to secure the loan, like by foreclosing on your home or repossessing your car or other personal property. In almost all cases, it's not a good idea to risk losing your home or other property to pay off credit card debts.

Balance Transfer Credit Cards

You can get a new credit card to consolidate other credit card debts. With this option, you transfer the balances from your old credit cards to the new one. Some balance transfer credit cards offer incentives, like a 0% interest rate on that balance for a limited time.

Can I Still Use My Credit Card After Debt Consolidation?

As long as you don't close the account and it is in good standing, you can still use your credit card after debt consolidation. But you must be careful not to take on too much debt. Pay off the balance each month, and be careful with your spending.

Does a Debt Consolidation Loan Close Your Credit Cards?

Debt consolidation doesn't automatically close your credit card accounts. But if keeping an account open tempts you to rack up more charges, then it might be a good idea to close the account.

However, you might damage your credit scores by closing the account. Closing an account will increase the ratio of your overall debt to available credit. So, if your goal is to raise your credit scores, don't close the account, especially if the account is old. Closing the account could decrease the average age of your credit history, which also lowers your credit scores.

If the card doesn't accumulate fees, consider keeping the account open—just stop using the card regularly. (You'll need to use the card every now and then; otherwise, the credit card company might close the account on its own.)

Can You Consolidate Car Loans and Credit Cards?

You can consolidate different kinds of loans, like a car loan and credit card debt, into one new loan. For example, if you take out a personal loan, you get the loan proceeds in one lump sum. You can then pay off the other debts.

How to Consolidate Credit Card Debt Without Hurting Your Credit

Consolidating your existing credit card debt by transferring it into a new debt might initially damage your credit. This negative impact is because credit scoring models view older debts more favorably, especially if you have a solid history of paying on time. In addition, consolidation loans, particularly those from finance companies or similar businesses, could be viewed negatively by potential creditors who see them in your credit file because they might imply prior debt problems.

Also, lenders that make consolidation loans are often unwilling to give you interest rate information until you fill out their applications, making it difficult to comparison shop without triggering an inquiry to your credit history, which will ding your credit. If you're considering a consolidation loan, tell the lender that you don't want to have a credit inquiry made or an application submitted until you get information about the interest rate, even if you provide answers to its questions.

However, consolidating your debt can help your credit scores in the long run if you make timely payments on the new debt. Also, if you keep your credit utilization ratio (the percentage of your total credit lines you're currently using) low, your credit scores will improve.

Is Consolidating Credit Card Debt a Good Idea?

Below are some of the main factors you should consider when deciding whether consolidating your credit card debt is in your best interest.

Can You Afford to Pay Off Your Credit Cards?

Consolidating your credit card debt doesn't eliminate it. Even if the consolidation loan reduces your monthly payment, you still have to pay off all you owe.

So, if you don't have a steady income or can't afford your monthly payment, consolidating your credit card debt probably won't help you get back on track.

Will Consolidating Your Credit Card Debt Reduce Your Interest Rates?

One of the main benefits of consolidating your credit card debt is getting a reduced interest rate. Reducing your interest rate allows you to lower your monthly payment and, hopefully, pay off your debts sooner.

But if you can't lower your interest rate with a consolidation loan, then it's probably not worth the extra cost and fees you'll incur consolidating.

Will It Take Longer to Pay Off Your Debt If You Consolidate?

By consolidating your credit card debt, sometimes, you can significantly reduce your monthly payment. But don't assume that your payment went down solely because of a lower interest rate. If your new monthly obligation is substantially lower, it might mean a longer repayment term.

If you extend your repayment term by taking out a consolidation loan, it might take you significantly longer to pay off your credit card debt. While it could be nice to have a more manageable monthly payment, you'll pay more interest over the life of the loan.

Review the terms of any consolidation loan carefully before deciding that it's the right choice for you.

What Is the Root Cause of Your Debt?

If your main problem is overspending, consolidating your credit card debt probably won't help. Once you pay off your existing card balances with a consolidation loan, those cards will have a zero balance again. You might then be tempted to use them before you pay off the new debt, which puts you in a bigger financial hole.

Should I Consolidate My Credit Card Debt?

If you can't afford to pay off your credit cards, consider other alternatives, like settling them on your own or with the help of a legitimate credit counseling agency or lawyer or filing for bankruptcy. By negotiating, you might be able to:

  • get a discount on the total debt owed
  • arrange for more favorable payment terms (like a reduced interest rate, a lower minimum payment, or the removal of late penalties or other fees), or
  • get the creditor to remove negative information from your credit reports.

Be sure to consider all of the consequences of getting a consolidation loan. Again, the interest rate might be high, the repayment term could be lengthy, and you could risk losing property (if you default on a secured consolidation loan).

Should I Use a Debt Consolidation Company to Help Me Consolidate My Credit Card Debt?

Many for-profit companies claim they can help you consolidate or settle your credit card debt so that you pay less or reduce your payments. There are hundreds of fraudulent debt consolidation and settlement companies, and it can be very easy to get pulled in by a scam. While some legitimate credit counseling agencies (see below) provide debt management services for a low fee, many scammer companies charge huge fees and do little on your behalf.

Even if a debt management company does try to help you, you'll have to pay a lot for services that you could do yourself or would be better off paying to a lawyer or legitimate credit counseling company. It's best to avoid for-profit debt management companies altogether.

How to Consolidate Credit Card Debt On Your Own

Again, you can hire a debt consolidation company to help you consolidate your credit card debt, but these companies often charge pricey initial and monthly fees. And many of these companies are scammers. You can easily consolidate debt on your own.

If you need help negotiating with creditors or debt collectors, consider talking to an accredited, nonprofit credit counseling agency or a reputable attorney rather than hiring a for-profit debt management service. With bankruptcy, you might be able to eliminate your credit card debt.

How to Find an Accredited, Nonprofit Credit Counseling Agency

Legitimate credit counseling agencies offer financial help, including debt management plans and debt consolidation advice, for free or at a minimal charge. These agencies also provide credit counseling, budgeting guidance, and debt management advice at no or low cost. To find a legitimate credit counseling agency:

  • Look for a company that's accredited, usually by the Council on Accreditation (COA) or the International Organization for Standardization (ISO).
  • Consider using a member of the National Foundation for Credit Counseling (NFCC), which is accredited by the COA.
  • Find out if the counselors working for the agency are certified by an independent agency, which means they've passed a certification exam that tests for understanding in areas like counseling, budgeting, credit and consumer law, debt management, and bankruptcy.
  • Check to make sure no complaints have been filed against the company with your state attorney general's office, the Better Business Bureau, and local consumer protection agencies.

Read More Articles

Learn what happens when a credit card company writes off your debt.

Find out if you can avoid a wage garnishment if a credit card company gets a judgment against you.

Get more information about closing credit card accounts to manage debt.

Getting Help From an Attorney

Different kinds of lawyers provide services to help people deal with their debts. Two of the most common services that lawyers offer are representing debtors in bankruptcy proceedings and negotiating with creditors to settle debts. (Be aware that if you settle a debt for less than you owe, you might face a tax liability. The IRS generally considers canceled debt of $600 or more as taxable, though there are some exceptions.)

Whether you should try to eliminate your debts through bankruptcy depends on your circumstances. If you want to learn more about filing for bankruptcy, talk to a bankruptcy lawyer. To find out more about settling your debts, speak to a debt settlement attorney.

If you need help deciding whether debt consolidation, negotiation, or bankruptcy is right for you, consider consulting with both a debt settlement lawyer and a bankruptcy lawyer to get different perspectives and learn about all available options. Many bankruptcy attorneys and debt relief attorneys offer free consultations and will quote you a fee after evaluating your circumstances.

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