How to consolidate credit card debt to streamline your payments and lower your interest rate
- Consolidating credit card debt means taking out one new loan to replace multiple loans, and consolidate them into a single monthly payment that's preferably at a lower interest rate than the original loans.
- Two of the most popular options to consolidate credit card debt are transferring the debt to a balance transfer credit card or taking out a personal loan.
- A balance transfer card can be a good idea if the transfer fee is worth it, and if you know you'll be able to pay all or most of your debt before the introductory APR expires.
- A personal loan could be a better choice if you need more time to pay, and if you can get a lower interest rate than you currently have on your debt.
- Note that consolidating your credit card debt doesn't mean you're debt-free. You're taking out a new debt to replace your old ones, and you're still responsible for paying it back.
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When you have credit card debt on multiple cards, from more than one lender, it can feel like a scramble to keep up with your payments every month.
Credit card consolidation can be an option to reduce the stress of multiple loans. Debt consolidation is the process of combining your debts from multiple lenders into a single loan, typically at a lower interest rate. Essentially, you ask a lender - sometimes a credit card, sometimes a bank - to buy out your multiple loans, and you agree to pay back the lender according to its terms.
The primary benefit to debt consolidation is that after consolidating, you only have one payment to make each month instead of tracking down the information for a handful of lenders. Plus, you might be able to consolidate your debt for a lower interest rate than the original loans (or at least some of them) and ultimately save more on interest payments over time.
How to consolidate credit card debt
1. Know the numbers
If you want to consolidate credit card debt, you need to know the numbers. How much credit card debt do you actually have? How many credit cards have a balance? Make a list of your balances, your interest rates, and your lenders.
2. Review your options
There are various options you can pursue for credit card consolidation, but the two most popular options are:
Open a balance transfer card
A balance transfer card allows borrowers to transfer their balances onto a new credit card, typically with a 0% interest rate for an introductory period of time. If you're able to pay off your debt within the promotional period at a 0% interest rate, you have the potential to save a lot of money on interest.
It's important to note that many balance transfer cards have balance transfer fees between 3% and 5%. Before transferring a balance, calculate how much you'll spend on the fee and make sure it's worth it. You'll also want to read the fine print to know exactly how long the promotional period lasts, and have a strategy to pay it all or most of your debt during this time.
Take out a personal loan
Another option for credit card consolidation is to take out a personal loan. You can get a personal loan at a local credit union or financial institution as well as online. Personal loans can be a good credit card consolidation solution as it may offer a lower interest rate than your credit cards.
The caveat here is that you must have good credit to score a better rate. Read the terms and conditions and understand what fees may be involved when taking out a personal loan.
Look at the APR, repayment term, monthly payment, promotional period and the terms and conditions. Reviewing these side-by-side can help you decide which option will be a better fit for you.
3. Apply for credit card consolidation
Once you've decided on a credit card consolidation option, it's time to apply. If you're going with the balance transfer card route, apply directly with the credit card company. You'll need to provide your personal info and provide info about the credit cards you're consolidating. Take note of the promotional period and what the new APR will be once the promotional rate is over.
If you're going the personal loan route, scout lenders in your community and online through a loan comparison site like Credible. Make sure you can get approved for a loan that is enough to cover your debt and that you score a lower interest rate. You'll need to provide your personal information as well as your financial info.
For both credit card consolidation options, your credit will come into play and determine your approval as well as your interest rate. You want to make sure that credit card consolidation can save you money and make payments more manageable.
4. Address the root cause of your debt
When you're stuck in debt and managing various loans, it's overwhelming. Credit card consolidation can seem like a great solution to your problem. While credit card consolidation can help streamline your payments and potentially save you money on interest, if you're not careful it can lead to more debt.
The fact is you're taking out another credit card or loan. If you don't have a strategy to pay it back, you'll just end up in more debt. The best strategy to pay back your loans is up you to, but some people have taken on side hustles to generate more money to put towards debt, made a point of paying more than the minimum on their monthly payments, used free websites and apps to keep track of their progress, and instituted the debt avalanche or debt snowball strategies.
5. Pay down the new loan
When all of your loans are paid off, it's time to pay down the new loan. You'll want to make payments on your current loans until the balance transfer comes through or until the personal loan pays off all of your current debts.
Then, it's time to conquer your balance transfer credit card or personal loan. Make payments each month and if possible, pay more than the minimum. If you have a balance transfer card, know the promotional period and work to pay off your balance before the period ends.
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