Should I Consolidate Credit Card Debt?

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

Updated by , Attorney

If you're struggling to pay off multiple credit cards, consolidating your debt could 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 all of your bills into one lower monthly payment, the tradeoffs for getting that lower payment might be that you'll have a longer repayment term and have to pay more interest over the life of the loan.

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 you've exhausted 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. You can consolidate your debts by:

  • taking out a consolidation loan or
  • using a debt consolidation or debt management company.

How Do Credit Card Consolidation Loans Work?

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.

Some finance companies, bank subsidiaries, and similar lenders make unsecured consolidation loans—that is, they lend you money without requiring that you pledge any property as a guarantee that you'll pay. If you have a good credit score, 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. You'll probably 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.

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 just 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.

Is Credit Card Debt Consolidation Right For You?

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 usually means 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.

Consequences of Consolidating

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). In addition, consolidation loans, especially 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. 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.

Should I Use a Debt Management Company to Help?

Many for-profit companies claim they can help you consolidate or manage your credit card debt so that you pay less or reduce your payment. Typically, here's how these companies work: Instead of getting a new loan to pay off your credit cards, the debt management company tries to convince the credit card companies to reduce your interest rates or otherwise lower your monthly payments. Each month, you make a single payment to the debt management firm, and it distributes a portion of your payment to each of your creditors. Usually, it keeps a percentage—or sometimes all—of your payment to cover its fees.

Scammer companies also sometimes advise debtors to default on their credit card payments and instead pay them. After taking their monthly fee, they put the rest of your payment into an account to accumulate a lump sum large enough to offer the credit card company. In the meantime, your credit score gets worse because you've stopped making payments with no guarantee of actually settling the debt. Defaulting on the debt will likely lead to debt collection activities or a lawsuit against you. And, some major credit card companies refuse to work with debt settlement agencies.

Hundreds of fraudulent debt management companies exist, and it can be very easy to get pulled in by a debt settlement 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.

Consider Other Debt Relief Options

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 report. 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 a 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:

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 exceptions exist.)

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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