Your Ultimate Guide to Credit Card Consolidation

credit card consolidation

Americans owed more than $1 trillion in credit card debt in 2016 according to the Board of Governors of the Federal Reserve. If you’re a borrower and you feel like you’re paying too much in interest — or if you have lots of debt spread across different credit cards — credit card consolidation may be a good approach to getting your debt under control.

Credit card consolidation can often reduce costs by lowering your interest rate. “Since credit card rates tend to be in the high teens to low twenties, a reduced rate offers the chance for some creative refinancing,” said Warren Ward, certified financial planner and founder of WWA Planning & Investments.

Unfortunately, if not done the right way, consolidating debt can sometimes make your financial situation worse. “The saying ‘robbing Peter to pay Paul,’ sometimes is used when discussing debt consolidation,” warned Magdalena G. Johndrow, certified fund specialist and associate financial advisor at Farmington River Financial Group. “If you cannot save money by negotiating a lower rate, it typically doesn’t help to consolidate. In this case, you are simply borrowing money to pay off borrowed money without any added benefit to you.”

Since credit card consolidation could be a major benefit or a big detriment depending on how you do it, it’s important to understand the process and consolidate only if it makes financial sense. This guide will tell you everything you need to know to make your choice.

What is credit card consolidation?

Credit card consolidation is the process of combining multiple debts into one new loan, ideally with better terms. As Johndrow explained, “debt consolidation is essentially taking out a new loan in order to pay off all your existing loans. Moving forward, you only have to repay the one new loan you took out.”

As our credit card consolidation calculator shows, if you owed $5,000 on your MasterCard with an 18% interest rate and $200 monthly payments, and you owed $2,000 on your Visa with an 18% interest rate and $80 in monthly payments, you could consolidate these two debts.

If you consolidated by taking a three-year loan at a 10% interest rate, you would drop your monthly payment from $280 to $226. You would pay $1,131 in interest over the life of the loan instead of $1,680, which would save you $549.

credit card consolidation

How does credit card debt consolidation work?

To consolidate credit card debt, you’ll need to apply for a new loan from a financial institution. “You may obtain debt consolidation services through a bank, private lender, home equity loan, and/or in some instances, debt relief companies,” Johndrow said.

You’ll need reasonably good credit to qualify for debt consolidation at a favorable rate. After you have applied and qualified for a new loan, you’ll use the proceeds from the new loan to pay off the debts you were hoping to consolidate.

For example, if you took a personal loan from your local credit union for $7,000 to repay your $2,000 Visa and a $5,000 MasterCard balances, the credit union would deposit $7,000 into your checking account, which you would then use to pay off the balances in full.

You could close the credit cards after paying them off, but Johndrow does not recommend it. Closing the credit cards could lower your debt-to-credit ratio, which would hurt your credit score. Be careful, though. “Open credit cards may be tempting to use, especially if you haven’t fixed your budget and spending habit,” she said.

If you consolidate your debt but run up balances on your open cards, you’ll be in a much worse financial situation because you’ll be in credit card debt again and have a personal loan to pay off.

“All too often, we hear about people using the [debt consolidation] strategy to increase their credit line and their spending,” Ward said.

What are your options for consolidation?

There are a couple of options for debt consolidation.

  • Credit card balance transfers. “I think the classic example of consolidation is when someone is offered a new credit card with a low — sometimes even zero — interest rate, stipulating that other card balances be rolled into the new account,” Ward said. “These transfer rates are commonly locked-in for some specific period of time as long as payments are kept current.” ValuePenguin recommends credit card balance transfers as the best option for consolidating less than $15,000 in debt.
  • A personal loan. Debt consolidation is the second most common reason people apply for personal loans, according to a 2017 SuperMoney study. The average interest rate you’d pay on a personal loan ranges from 10.3% to 32%, depending upon your credit, according to ValuePenguin.
Credit Score Average APR on Personal Loans
720-850 10.3% to 12.5%
680-719 13.5% to 15.5%
640-679 17.8% to 19.9%
300-639 28.5% to 32%
  • There are also companies that advertise special consolidation loans or consolidation plans. But, debt consolidation programs are typically not an effective way to reduce your debts because there are often high fees. “It’s very hard to pay down a large amount of debt when the program you are paying each month takes large fees off the top, leaving little for the creditors,” personal finance expert Matthew Zimmelman told CBS News.

How to go through the credit card consolidation process

If you’re thinking about consolidating debt, you’ll want to evaluate your options and see which debt consolidation solution would save you the most money.

“Begin by contacting several companies and seeing what terms they can provide you,” Johndrow said.

Your best resources to find a loan will vary depending upon what method of debt consolidation you want to use.

  • If you’re interested in a credit card balance transfer: You can find lists online of balance transfer credit cards offering low interest rates or 0% interest. Compare the lengths of the promotional periods (six months, 12 months, 18 months or longer), and find out if there is a balance transfer fee (a 3 percent fee is common). The new card will require minimum monthly payments, but you should ideally pay more than the minimum to repay the balance before the promotional rate expires.
  • If you’re interested in a home equity line of credit: Your existing mortgage lender or other banks and credit unions offer home equity lines of credit. Compare interest rates, application fees, appraisal costs, monthly payments, and find out if the rate is fixed or variable.
  • If you’re interested in a personal loan: You can find a personal loan through local or national banks and credit unions. You can also use our marketplace to apply for personal loans. Compare interest rates, repayment periods, monthly payments, and application fees. Find out if there are any prepayment penalties in case you want to pay off your loan early.

When you compare options, you don’t just want to focus on whether your new payment will be lower. Looking at the whole picture is vital.

“Make sure that you getting truly a lower rate, not simply [lowering your payments] because the length of the loan is extended,” Johndrow warned. “In this scenario, you may obtain a lower monthly payment but you’ll stay in debt for a longer period of time, therefore paying the lender more.

You’ll also want to find out qualification requirements before applying to make sure your income and credit score are good enough to qualify for the loan.

What are the advantages of credit card consolidation?

Consolidating debt can have substantial advantages if you find the right consolidation loan, including:

  • Lower interest rates. A lower interest rate will do more than just decrease the total amount paid to your creditor and reduce your monthly payment. “If the interest rate is lower, you can often pay more into the principal value of the loan, paying your debt off faster,” Johndrow said.
  • Credit score improvements. “The percentage of credit utilization is a significant factor in someone’s credit rating,” Ward said. “Adding additional credit [from the consolidation loan] reduces the percentage in use, yielding a positive effect on [your] credit score.”
  • Convenience. Consolidating loans means you have just one payment to make and, with everything in one place, missing payments becomes less likely.

The biggest benefit may be that consolidation allows you to get a handle on your financial situation.

“After over 25 years helping people with their investment and planning decisions, I think the most critical component of anyone’s financial life is maintaining a balanced budget,” Ward said. “If consolidation helps that happen, it’s a significant pro.”

What are the disadvantages of credit card consolidation?

While there are lots of reasons to consolidate, there are some serious downsides to consider.

  • Low interest rates may not stay low forever. If you take a balance transfer, the low rate is just promotional; if you haven’t paid off the debt by the time the promotional period expires, interest could rise significantly. Missing a single payment could also send the rate skyrocketing. Plus, Ward said the low promotional rate is usually only for the transferred balance. “For everyday purchases, rates are almost always quite high. Avoid using the card for everyday purchases.”
  • You may put your home at risk. If you can’t make payments on credit card debt, your house is usually still safe from being lost — even if you have to file bankruptcy — as long as you’re current on your mortgage. But, if you borrow against your house to repay debt, you’re turning that debt into secured debt and putting your home at risk. Even if you can make the payments, you’re depleting the equity you have in your house. “Falling too far behind might result in the loss of all home equity — an especially ugly con,” Ward said.

Finally, when you consolidate debt, you free up your line of credit so you have more available credit that you could potentially max out. “If you increase borrowing without a plan to reduce debt, you’ll be in a worse position than before,” Ward cautioned.

Should you consolidate credit card debt?

Whether you should consolidate debt or not will depend upon whether you can get a new loan that will save you money on your current debt without taking on risks you feel are unacceptable, including putting your house in jeopardy.

“If you lower your interest rate when you consolidate your credit, then yes, consolidation can help save money,” Johndrow said. But, there’s a caveat: If you lengthen your repayment term — even if you pay less interest — you could end up owing more.

If you don’t have a plan to get your finances under control, you may want to tackle that issue first before consolidation.

”It’s important to address the underlying issue of debt, budgeting, and your spending habits to really remain on track and to not find yourself in this scenario again,” Johndrow said. She recommends working with a financial advisor to set up a budget and debt repayment plan that works.

If you think debt consolidation may be a smart choice for you, shop around at our personal loan marketplace or at our credit card marketplace to find out about new loan options that could allow you to repay off your higher interest debt.

Interested in a personal loan?

Here are the top personal loan lenders of 2018!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.29% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.29% APR assumes current 1-month LIBOR rate of 1.34% plus 4.20% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2017, the one-month LIBOR rate is 1.23%. Variable interest rates range from 6.02% – 15.97% (6.02% – 15.97% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with Citizens Bank at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, Citizens Bank checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000Visit Upstart
5.29% - 14.24%1$5,000 - $100,000Visit SoFi
8.00% - 25.00%$5,000 - $35,000Visit Payoff
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print, understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.