What Are Credit Card Debt Consolidation Loans?

Some Information About Credit Card Debt Consolidation Loans

Managing bills can be stressful. No one chooses to get into a situation where they can't pay their bills, but this situation can happen to anyone. Unexpected expenses arise, your income changes, and suddenly you have to choose which bills to pay and which you can't afford.

If this situation happens, credit card consolidation can be one of many ways to manage credit card debt. However, you need to think about several key considerations before you decide whether this approach is right for you.

Assistance From Your Credit Card Company

First of all, if you think you may miss or have already missed a credit card payment, consider contacting your credit card company directly. The Consumer Financial Protection Bureau, or CFPB, recommends reaching out to your credit card company as soon as possible if you think you need help.

The company may be able to work with you to keep you on track or help you get back on track. Everyday, credit card companies work with customers who can't pay their bills. Their customer service teams may be able to help you, by offering, among other things, custom payment plan options.  

What Is Credit Card Debt Consolidation?

If you’re currently making payments on several credit cards each month, you may be able to combine (or consolidate) them into a single loan or card with one monthly payment.

To consolidate, you transfer your balances from two or more cards onto one card or loan. You can consolidate all of your cards at once or choose to consolidate only a few.

Why Do People Consolidate Credit Cards?

Consolidating credit cards may have benefits. Two examples include:

  • Single Monthly Payment: Dealing with a single monthly payment through consolidation could make your debt easier to manage.
  • Potentially Lower Interest Rate: You may be able to lower your credit card interest rate (also known as APR) by consolidating to a card or loan with a lower rate. This way, you can pay less interest on your debt.

Debt Consolidation Risks

Before consolidating debt, consider possible risks. Some examples include:

  • Check the Interest Rate: Make sure your new interest rate is lower than the current one on all balances you're consolidating or you may end up paying more in interest on your consolidated loan.
  • Know When an Introductory Rate Ends: If you're transferring to a card or loan with an introductory rate promotion, consider whether you can pay off your debt before the promotion ends and the interest rate rises. If you can't pay off the debt before the promotion ends, you could end up paying more in interest over the long term.
  • Be Aware of Fees: Practices may vary or change but consolidation offers may come with fees. Be sure to ask about and understand any fees before agreeing to a consolidation.

Does Credit Card Debt Consolidation Affect Your Credit Score?

The effects of consolidation may be different from person to person depending on the specifics of their financial situations. The exact impact and how it could affect your credit score depends on other factors beyond just credit card debt consolidation. Be sure to check your credit report so you can monitor your status.

Two examples of how credit card debt consolidation could impact an individual’s credit score include the following:

  • Applying for a new line of credit (a new credit card) or a personal loan to consolidate your debt generates a credit inquiry. Credit inquiries may be reported to credit bureaus.
  • Credit card companies typically report to credit bureaus whether payments are on-time or late and also the total amount of debt. If debt consolidation helps you make on-time payments and pay down your debt this could impact your credit score.

Credit Card Debt Consolidation Loan Examples

You can consolidate your debt in several ways. The following is not an exhaustive list but provides examples to consider.

Balance Transfer Cards

A balance transfer card is a credit card used to consolidate multiple balances into one credit card account.

How it works:

  • Part or all of your debt from other cards is moved to the balance transfer card.
  • You make payments to the new card going forward.

Some Things to Keep in mind:

  • Introductory interest rates may apply to transferred balances for a set period.
  • Introductory interest rates may apply only to transferred balances and not to new charges.
  • A higher rate following the introductory rate can cost you money if you don't pay off your debt in time.

Personal Loans

Practices may vary, but typically personal loans are unsecured. If a personal loan is unsecured, it means you don't have to put up your home or vehicle as collateral to be approved for the loan.

How it works:

  • You apply for a loan to cover the debt from several credit cards.
  • After receiving the loan, you can pay off your cards or pay them down with the funds and then make a single regular payment to pay off the personal loan.

Some Things to Keep in mind:

  • The interest rate on your loan should be lower than the interest rate for your cards.
  • Some personal loans may come with fees or credit insurance that may cost you more than what you save in interest.

Home Equity Loans

With a home equity loan, you borrow money using the equity you've accumulated in your home as collateral.

How it works: As explained by the U.S. Consumer Financial Protection Bureau (CFPB):

  • “You receive the money from a home equity loan as a lump sum.”
  • “A home equity loan usually has a fixed interest rate.” This means the interest rate will not change.

Keep in mind: The CFPB also states:

  • “If you cannot pay back the home equity loan, the lender could foreclose on your home.”
  • "Home equity loans may have upfront fees and costs, so be sure to compare more than just your monthly payment when shopping around.”

Debt Settlement Companies

You might have heard advertisements for debt settlement companies claiming to negotiate a settlement with credit card companies on your behalf. You may want to learn more about how these companies work and other possible costs that come with working with them

Should You Consolidate Your Credit Card Debt?

Everyone’s situation is different. You should do your research and decide based on your unique situation.  You may want to consider other debt relief options, including credit counseling. A credit counselor is trained to understand your financial situation and help you figure out how best to manage your debt. You may also want to learn about other debt relief options.

You can get a list of government approved credit counselors by calling the National Foundation for Credit Counseling at 800-388-2227. Or visit this list of counseling services from the U.S. Department of Justice.

If you're facing credit card debt and paying your bills is a struggle, consolidating credit card debt may offer a way to help you get back on track. Regardless, know that you're taking a positive step to better managing debt simply by taking the time to learn about possible options.

We hope that you found this helpful. Our content is not intended to provide legal, investment, or financial advice or to indicate the Capital One product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.

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