Should I consolidate my credit card debt?
If you’re having trouble paying your credit card bills, consolidation can give you the flexibility you need to pay off your debts. It can lower your payments, reduce your interest costs and help you reduce your debt faster. Ideally, the rate you receive on the loan is lower than the combined interest rate of your credit cards. You’ll need good to excellent credit (690 to 850 credit score) to qualify for the lowest rates.
If your credit card debt is unmanageable – you can’t pay it off within five years and the total balance is half or more of your gross income – then debt relief can be more effective than debt consolidation.
How to Get a Credit Card Consolidation Loan
Follow these steps to start the credit card consolidation loan process.
Know your balances and rates: Add up what you owe on the credit cards you want to consolidate, sorted by total balance and interest rate.
Aim to bundle cards with rates above the annual percentage rate you can get a consolidation loan, to save on interest. For example, if the rates on your credit card balances are between 15% and 30% APR, look for a consolidation loan under 15% APR.
A loan’s APR is its interest rate plus all fees, including assembly costs. Personal loan APRs range from around 6% to 36%, depending on your credit score, annual income, debt-to-equity ratio, and where you get a loan.
The calculator displays your credit card’s combined APR and you can see the impact of different loan rates and terms on your payment and savings.
Compare loan features: When shopping for loans, compare features as well as the prices. Some lenders offer direct payment to creditors, which means they send your loan proceeds to your credit card issuers, simplifying the debt consolidation process.
Other features that may be important to you include free monitoring of your credit score, credit health tools, or hardship programs that temporarily suspend payments if you lose your job. Funding time is another consideration if you need a loan quickly.
Pre-qualify and apply: Pre-qualification with lenders allows you to preview the loan rates and terms you may receive, without affecting your credit score. It also makes it easier to compare loans from multiple lenders.
Get Approved and Funded: Debt consolidation loans can take a day to a week to fund, depending on the lender.
If the lender pays your creditors directly, check that the payments are applied to your balances. If direct payment is not offered, you will need to repay each credit card with money deposited into your bank account.
Prepare to make your first new loan payment, which will likely be a month after funding.
Credit card refinancing vs debt consolidation
Refinancing credit card debt is similar to consolidation, but instead of getting a personal loan to pay off your credit cards, you get a low-interest credit card and transfer the balance from one or more existing credit cards on the new card.
Refinancing is often called balance transfer, and many balance transfer credit cards offer an introductory APR of 0% for 12-21 months. As with personal loans, you’ll need good or excellent credit to qualify for the lowest rates.
Unlike debt consolidation loans, there is no set repayment term on a credit card (just a minimum payment requirement) and rates are often variable rather than fixed.
Balance transfers work best if you have a small balance to consolidate ($15,000 or less) and only if the interest savings outweigh the fees required to complete the transfer. Try to pay off the balance in full before the zero rate promotion expires and the APR resets to its normal higher rate.
What to do after credit card consolidation
Plan your payments: If you didn’t opt for automatic payments at loan closing, this now allows for convenient, on-time monthly payments, helping you avoid late fees. Automatic payments are a way to manage your loan repayments.
Stick to a budget: The new repayment of the loan should be part of a budget which allocates the income to your needs, wants, savings and debts. Budgeting can help you change your spending habits, spot areas to cut, and increase your cash flow.
Avoid new credit card debt: You’ll have a lot more buying power on your credit cards after consolidating them, and you might be tempted to use them. Carefully track your spending and aim to keep your credit utilization rate less than 30% on each card.