Credit Card Debt Consolidation: A Step-by-Step Guide

Credit card debt consolidation is the process of combining all of your outstanding credit card debt into one payment. By doing so, you could achieve a more manageable monthly payment plus pay less in interest on the total debt. Consolidating debt involves basic steps like gathering information on your debts, comparing debt consolidation loan options terms, and taking action.

Key Takeaways

Credit card debt consolidation can simplify your monthly payments and save you money on interest.
Methods of consolidation include balance transfer credit cards, personal loans, home equity loans, and debt consolidation loans.
Consider factors such as interest rates, fees, and potential credit score impact before consolidating, to make sure it will save you money.
Consolidating debt involves basic steps like gathering information on your debts (creditor names, account numbers, amounts owed, payment addresses), comparing debt consolidation loan options terms, and taking action.

Benefits of Consolidating Credit Card Debt

Combining all of your credit card debt into one account could provide several benefits. They include:

Lower interest rates

By consolidating your credit card debt, you could obtain a lower interest rate than you pay on your current credit cards. Not only will that save you money, but you could use those savings to pay your debt down faster. You could also use some of your savings to create an emergency fund if you don't already have one.

Simplified payments

By consolidating your credit card debt, you will have just one payment to worry about each month instead of several. That could make it easier to budget and to avoid missing any payments.

Methods of Consolidating Credit Card Debt

There are several ways you can consolidate your credit card debt to make it more manageable. The major ones are:

Balance Transfer Credit Cards

Many credit card companies offer cards with low or 0% interest rates on balance transfers. Typically the promotional interest rate is for a limited time, so one of these cards can be a great deal if you are able to pay off the balance before the promotion expires. If you choose this option, you likely will be charged a balance transfer fee, which could be a set amount or a percentage of the transferred balance, usually whichever is higher.

"This fee is usually 3% to 5% of the transferred amount," says Christopher M. Naghibi, executive vice president and chief operating officer at First Foundation Bank in Irvine, Calif. "If you're considering a balance transfer credit card, you really owe it to yourself to weigh this cost against the potential interest savings or other benefit to you. Sometimes, it doesn't make sense economically."

There are other potential drawbacks to these cards, too. For instance, if you don't pay off the balance before the promotional interest rate expires, your rate could increase substantially. Also, if you make late payments, you could lose the promotional interest rate. What's more, if you use the card for new purchases and don't pay them off right away, you will generally have to pay interest on that amount, likely at a higher interest rate than the promotional rate.

To apply for a credit card balance transfer, you will need to fill out an application for the card. The credit card company will run a credit check, so if your credit score is not great, you may get denied. Also, when searching for a balance transfer offer, you may need to look at credit cards from lenders other than your existing credit card company.

"You'll likely need to find a balance transfer card from a different bank than where your current debt resides if they don't specifically allow you to do it in their fine print," Naghibi says. "So if JP Morgan Chase offers a balance transfer credit card, you can't transfer your existing Chase Sapphire Preferred card balance to it."

Depending on your creditworthiness, many credit card issuers will lower the interest rate on your existing balances if you call their customer service departments and let them know you are otherwise considering transferring balances in response to a balance transfer offer from another card issuer.

Personal Loans

Many lenders, such as banks and credit unions, offer personal loans that can be used for a variety of purposes, including consolidating credit card debt. With such a loan, you could trade in many payments for just one, often at a lower interest rate.

However, a personal loan may come with added upfront costs, such as application fees and origination fees. So it's important to review these costs and determine whether the long-term savings would be worth the expense.

To apply for a personal loan, you will need to fill out an application and submit to a credit check. You may also be asked to supply bank statements, pay stubs, and tax returns so the lender can evaluate your ability to repay the loan.

Home Equity Loans

Home equity loans are backed by the equity you have accumulated in your home. They may offer lower interest rates than other kinds of loans, but they can also have higher fees. "These loans generally come with origination fees, usually around 2% to 7% of the loan amount," says Sean Fox, president of debt resolutions at Achieve, a digital personal finance company in San Mateo, Calif. "Some lenders charge late fees and/or early repayment fees, so be sure to get all the specifics."

And because your home serves as collateral for the loan, bear in mind that if you fail to repay it, the lender could foreclose on your home to recoup its funds.

You can apply for a home equity loan with lenders including banks, credit unions, and mortgage brokers. You will have to fill out an application and supply any required financial records, such as pay stubs, tax returns, and bank statements. The lender also will run a credit check.

Debt Consolidation Loan

A debt consolidation loan is the same as a personal loan except that the money can only be used to pay off other debts. It has the same potential benefits and drawbacks as a personal loan, as well as the same application process.

Credit Counseling

While credit counseling doesn't actually pay off any debt on your behalf, it can be a valuable service to help manage your debt and make it easier to pay off. Credit counseling services are usually available through non-profit organizations such as the National Foundation for Credit Counseling. Counselors can help you set up a budget as well as payment plans or agreements with your creditors. These payment plans are not negotiations to reduce how much you owe; instead, they are agreements wherein the creditors agree to waive late fees or postpone collection efforts for a specific time period.

Credit counselors may also help you create a debt management plan, in which you make a single payment to the organization, which then pays your creditors each month. This may or may not incur fees.

Considerations Before Consolidating Credit Card Debt

Before choosing one credit card debt consolidation option over another, it's important to compare all of their fees and other terms. "Look beyond rates," Fox says. "Every lender will have different rates, as well as ways of working with customers. Sometimes, getting the absolute lowest rate may not be the best answer for someone's particular situation."

Steps to Consolidate Credit Card Debt

The process for consolidating your credit card debt is basically the same regardless of which option you choose:

1. Gather information

First, gather the information on your debts (creditor names, account numbers, amounts owed, payment addresses). You then need to do some research on debt consolidation solutions and determine each option's terms and conditions. Shopping around with different credit card companies, online lenders, banks, and credit unions is also important because their terms can vary. Bear in mind that your credit score and other individual factors will affect which options you qualify for and the rates you'll pay if you do qualify.

2. Compare options

Once you have all the information on the options you might qualify for, compare them to determine which one offers the best savings at the lowest cost. Consider how much you would save in both the short term and over the long term.

3. Take action

Once you narrow down your choice, you can apply for the credit card debt consolidation tool that works best for your situation.

Tips for Successful Credit Card Debt Consolidation

Once you consolidate your old credit card debt, it's important to pay down the new debt as efficiently as possible. That means:

Create a budget, and stick with it. Reining in spending will help keep your debt down and could even create additional savings you could apply to your existing debt.
Avoid new debt. Paying off your credit cards through debt consolidation could free up your cards for new purchases. Resist the temptation to do this so you don't fall into the cycle of more credit card debt.
Set up automatic payments. To avoid late or missed payments, set up an automatic payment plan to pay your monthly bill from your checking account.

Does Credit Card Debt Consolidation Hurt Your Credit Score?

You could see a small and brief negative impact on your credit score at the outset. That's because any new lenders you apply to will run a hard inquiry on your credit, which can ding your credit score.

In addition, if the lender requires you to close your existing credit card accounts, that could also have a negative effect. One of the major factors in your credit score is your credit utilization ratio, which compares how much debt you currently have outstanding to all of the credit you have available to you. The higher that ratio, the better. By paying off your credit cards with a new loan or credit card, but keeping those old accounts open, you can actually improve your credit utilization ratio. Closing the old accounts, however, could hurt it, at least until you've paid down enough of the new debt.

Can I Use My Credit Cards if I Consolidate My Debt?

If a credit card account remains open after you've paid it off through debt consolidation, you can still use it. However, running up another balance could make it difficult to pay off your debt consolidation account.

Is It Better to Consolidate Debt or Pay Cards Off Individually?

That depends on your financial situation. It may be simpler just to pay the cards off individually if you have the money to do so readily available. However, if paying off your cards is likely to take a long time, consolidation could most likely save you money and speed the process of becoming debt-free.

How Long Does Debt Settlement Stay on Your Credit Report?

Debt settlement and debt consolidation are two different things. In debt consolidation you refinance your debt but ultimately pay it off in full. In debt settlement you negotiate with your creditors to see if they will accept a partial payment as payment in full.

Debt settlement has a negative impact on your credit and can remain on your credit reports for up to seven years.

Do Banks Consolidate Debt?

Many banks do offer loan options to consolidate credit card debt. So you might want to start your search with a bank that you already do business with.

The Bottom Line

When credit card debt becomes overwhelming, consolidating those debts into one account can often provide a manageable, and less costly, way to pay them all off. However, to be successful, it's important to avoid taking on additional debt and to apply your savings to paying down the credit card or loan you're using to consolidate.