What is credit card consolidation and how does it work?

Staying on top of multiple credit card bills can be tough. But if you’re struggling to keep up with payments, one option that might help is consolidating your credit card debt. 

Credit card consolidation can simplify bill paying by combining multiple credit card bills into one single bill. There are different methods that can be used to do this, but there are some important questions worth asking before deciding to consolidate. 

Key takeaways

  • Credit card consolidation works by taking out a new loan or line of credit to roll multiple credit card bills into one monthly payment. 
  • Credit card consolidation methods include balance transfers, debt consolidation loans, home equity loans (HELs) and home equity lines of credit (HELOCs).
  • Consolidating credit cards may simplify bill paying and potentially lower overall monthly payments.

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What is credit card consolidation?

Credit card consolidation is the process of combining multiple credit card bills into a single bill. 

Credit card consolidation doesn’t erase your credit card debt. But it could simplify payments to help you better manage your debt and pay it off more quickly. It could even save you money on monthly payments, interest or both.

How does credit card consolidation work?

There are different ways to consolidate credit card debt. But typically the process involves taking out a new loan or credit card and paying off existing credit card balances with funds from the new account. From there, you begin making monthly payments toward the new loan or card.

By consolidating your credit card accounts, you can reduce the number of credit card payments you have to make each month. 

How to consolidate credit card debt

What works for each person may differ based on their situation. But here are some common credit card consolidation methods:

  • Balance transfers: A balance transfer is the process of moving a balance from one credit card to another. 
  • Personal loans: Debt consolidation loans are types of personal loans that let you combine multiple credit card bills into one fixed monthly payment.
  • Home equity loans and home equity lines of credit: HELs and HELOCs let you borrow against the equity you’ve built in your home.

Pros and cons of consolidating credit cards

Credit card consolidation has potential advantages and disadvantages to consider before making any decisions:

Credit card consolidation pros

  • Credit card debt consolidation can help simplify bill paying.
  • Some credit card consolidation loans can help you take advantage of a lower interest rate.
  • Finding a low introductory rate for balance transfers can potentially lower your monthly payments.
  • You may be able to pay off debt quicker using a debt consolidation loan with a fixed monthly payment.

Credit card consolidation cons

  • This process doesn’t necessarily offer a long-term solution for getting out of debt without fixing the underlying problem.
  • There may be upfront charges like balance transfer fees, closing costs or loan origination fees.
  • Debt consolidation loans don’t always offer interest rates lower than those on your existing accounts.
  • Certain debt consolidation companies may actually be debt settlement companies. According to the Consumer Financial Protection Bureau (CFPB), debt settlement companies may charge fees. And they might encourage you to stop paying your credit card bills while they’re negotiating terms. You can read more by visiting the CFPB.

Credit card consolidation FAQ

Here are a few common questions about credit card consolidation: 

According to the CFPB, there are a few things to try before applying for a loan or a new credit card to pay off your existing credit card debt:

  • Talk to a credit counseling service. A credit counseling service can give you money management tips and provide advice specific to your situation. This may provide the tools needed to better manage financial obligations in the future. 
  • Review your spending habits. While finding a solution to pay off credit card debt, it’s helpful to understand how the debt was accrued in the first place. 
  • Try adjusting your budget. You may be able to pay down credit card debt without a credit card consolidation loan by building a budget that works for your lifestyle.

There may be risks to any loan if you’re unable to successfully manage it. The potential fees assessed on a loan or balance transfer could end up costing you more in fees and interest than you save, even if you get a new rate that’s lower than your old one. Also, without a plan to reduce spending, credit card consolidation may not be a successful way to reduce your debt in the long run. 

If you’re able to lower your rates or your payments by consolidating, you may be able to pay more of your balance each month, which can be one good way to improve your credit. But it’s important to know that opening a new credit card account to transfer a balance does create a hard inquiry on your credit reports, which might lower your credit scores temporarily.

Consolidating won’t eliminate your debt or decrease the principal amount you owe. And sometimes you may have to pay upfront fees. There’s also no guarantee that you’ll get a lower interest rate or better terms than what you have with your current accounts. 

Credit card consolidation in a nutshell

Credit card consolidation is one way to streamline multiple credit card bills into a single bill. And if you’re able to secure a lower interest rate than you have on your current credit cards, it could lead to lower minimum monthly payments

Ultimately, credit card consolidation has the potential to help you better manage your credit card debt and pay it off more quickly. But don’t expect a debt consolidation loan or balance transfer to be a cure-all. There can be risks and caveats to keep in mind before committing to a new loan or balance transfer.

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