If your credit card payments are taking an inordinate bite out of your monthly budget, you may be able to find some financial relief by consolidating your credit card debt. Debt consolidation is a tool that may help move you more quickly toward your financial goals. And in some instances, consolidating your debt can also boost your credit score or at least do a little damage control by keeping bankruptcy at bay.
What Does It Mean to Consolidate Credit Card Debt?
Consolidating credit card debt means combining the unpaid balances of all your credit cards into one collective balance, which results in one monthly payment, to reduce your overall debt. An upside of consolidation is that your new monthly payment may be lower than the payments of all your credit cards combined. You may also be able to get a lower interest rate than you’re currently paying, which could save you money in the long run as well as reduce the time it takes you to pay off your debt.
How to Consolidate Credit Card Debt
You can consolidate your card debt in a number of ways including the use of balance transfer credit cards, loans or debt management plans. This is not a one-size-fits-all game plan; it’s a personal choice that’s based on your individual circumstances with your budget and financial goals in mind.
- Balance Transfer Credit Cards. By transferring all your credit card balances to a new credit card, you’ll put all this debt “under the same roof,” so to speak. You may have to pay a fee to transfer your card balances, but this fee may be offset by a zero-percent interest introductory special attached to the new credit card account. And although this zero-percent interest special is typically for a limited time only, it may bring significant monthly savings in the short-term.
- Loans. A home equity loan is a loan that your lender extends to you by using the equity in your home as collateral for the loan. When you use a home equity loan to pay your credit card debt, the new monthly loan payment takes the place of your individual card payments. You may qualify for a personal loan, which is an unsecured loan that does not require collateral. Personal loans are not earmarked solely for eliminating credit card debt – you may also use this type of loan for other things – but you can often get a lower interest rate for a personal loan than the rates on your credit cards. A debt consolidation loan is another type of unsecured loan, which differs from a personal loan because your lender requires that it must be used for debt reduction only. The lender typically pays off your debt directly without you even handling the funds.
- Debt Management Plans (DMPs). A credit advisor will work with you to custom-tailor a debt reduction plan that your budget can handle. The DMP adviser acts as an intermediary, contacting your creditors to negotiate the terms of an acceptable repayment plan.
Do Debt Management Plans Hurt Your Credit?
Some debt management plans have the potential to harm your credit because of how the DMP administrators manage their plans. (Or you may harm your own credit by failing to make timely payments to your DMP administrator.) On the flip side, if you pair the right debt reduction plan that improves your financial health with a reputable debt counselor to facilitate the plan, a DMP can also help your credit rating. After a DMP adviser negotiates repayment terms with your creditors, you typically send one monthly payment to the DMP administrator. In turn, the administrator makes payments to each of your creditors for you. In a perfect world, this arrangement works like a charm. Unfortunately, some DMP administrators don’t hold up their ends of the bargain because they fail to make timely payments to your creditors. And since you’re ultimately responsible for your bills, these late payments can damage your credit rating. If you're considering a DMP company, you can call your state attorney general's office to find out if there are any complaints on file against the business.
If you want to enroll in a DMP program, you can contact a reputable nonprofit consumer credit counselor, such as the National Foundation for Credit Counseling (NFCC) to find a counselor near you.
How Long Does a Debt Management Plan Stay on Your Credit File?
Your credit file notes your participation in a DMP for the duration of your plan, which is typically three to five years. Although this note is attached to your credit file, the note itself does not damage your credit score – late payments do. The note may, however, deter potential lenders from extending additional credit to you until you’ve successfully reached the end of your DMP participation.
Is It a Good Idea to Consolidate Credit Card Debt?
It may be a good idea to consolidate your credit card debt if you can lower your interest rate, shorten the repayment period or simply manage your debt with a single monthly payment instead of individual payments. If you're drowning in debt, consolidating your credit card payments into one payment may also help keep you out of bankruptcy, which will further damage your credit.
The Benefits of Consolidating Your Credit Card Debt
Whether you're overwhelmed with debt and you need financial relief or you just want to lower your monthly bills at a better interest rate, consolidating the debt from all your credit cards into a single monthly payment can move you toward either of these goals. Credit card debt consolidation also allows you to analyze your spending habits, draw up a monthly budget and improve your credit score. If you're not a financial expert – most of us aren't – you don't have to go it alone. You can contact a reputable and credentialed financial counselor for help.
- Federal Trade Commission: Coping with Debt
- National Debt Relief: What is Credit Card Consolidation?
- Forbes: The Risks and Rewards of Consolidating Credit Card Debt
- NFCC: Credit and Debt Counseling
- Federal Trade Commission. "Home Equity Loans and Credit Lines." Accessed Sept 29, 2020.
Victoria Lee Blackstone was formerly with Freddie Mac’s mortgage acquisition department, where she funded multi-million-dollar loan pools for primary lending institutions, worked on a mortgage fraud task force and wrote the convertible ARM section of the company’s policies and procedures manual. Currently, Blackstone is a professional writer with expertise in the fields of mortgage, finance, budgeting and tax. She is the author of more than 2,000 published works for newspapers, magazines, online publications and individual clients.