Dealing with credit card debt doesn’t have to make you feel hopeless. One strategy that could help is debt consolidation.
When you consolidate your credit card debt, you take out a personal loan for an amount equal to your total credit card debt. Then, you pay your cards off with that loan. That puts all your debt in one place, enabling you to focus on making only one personal loan payment per month until the debt is fully repaid.
According to our recent credit card survey, only 52% of respondents with more than $6,000 of credit card debt had consolidated. Of those who haven’t tried consolidating their debt, a quarter fear it will hurt their credit score.
But does debt consolidation hurt your credit? The answer depends on your situation.
Here’s a list of the pros and cons of debt consolidation, including how it could help — or hurt — your credit.
Pros of consolidating your credit card debt
For some borrowers, debt consolidation can be a helpful way to address a ballooning credit card balance problem. Here are some of the benefits.
1. You might qualify for a lower interest rate
If you have good credit, you might qualify for a lower interest rate on a personal loan than what you’re paying on your credit cards. The lower rate could save you money in the long run and help you repay your debt faster.
To get the best deal, shop around to compare personal loan interest rates. Some online lenders, including SoFi and Avant, do a soft credit pull when they quote your rate, so your credit score won’t be impacted until you formally apply for a loan.
2. It could make your debt simpler to track
If you have multiple credit cards, it might be tough to remember to pay each creditor on time every month. When you consolidate your debt, you have to think about repaying only one loan.
“You would only have to worry about a single monthly payment, cutting the number of payments you are managing now,” said Leslie Tayne, a debt settlement attorney at Tayne Law Group and the author of the book “Life & Debt.”
If you have a hard time keeping track of multiple payments and due dates, consolidating your debt could help ease the process.
3. It offers a structured repayment plan
One thing credit cards don’t do is set you up with a firm end date for when your debt will be repaid. If you only pay the minimum amount required every month, you could stay mired in debt for a long time. Even worse, if you continue to use the card, the amount you owe could vary with each bill.
Personal loans, however, come with a predetermined repayment term and amount. “They can give a consumer a defined repayment plan so they know exactly when they will be debt-free,” said Tayne.
4. It might improve your credit score
In some cases, consolidating your debt might improve your credit score.
Once you pay off your credit cards you’ll have a lower credit utilization ratio, which is an important factor in your credit score. The lower your credit utilization, the better it is for your score.
You also will add another type of credit to your credit history when you take out a personal loan, a factor that possibly could raise your credit score if you don’t have other installment loans.
Cons of consolidating your credit card debt
Not everyone benefits from credit card debt consolidation. It might not be the best option for you in some cases. Consider the following scenarios.
1. Does debt consolidation hurt your credit?
So does debt consolidation hurt your credit in some cases? It’s possible.
The answer depends on your habits. If you suddenly have a zero-dollar balance on your credit cards, the temptation to use them might be too strong to resist if an unexpected expense pops up. Before you know it, you could end up back in debt.
“When you realize you don’t have the cash flow,” said Tayne, “you’re going to start using credit cards again. Once you pay off that credit card, what happens is the credit card companies start sending you offers again. You say, ‘I’m just going to use it for an emergency,’ but an emergency becomes a day-to-day situation.”
This could sink you further into debt and hurt your credit. To successfully consolidate credit card debt, avoid using your credit cards until you’ve fully repaid your old debt.
2. Your monthly payment amount might increase
Depending on the terms of your new personal loan, your monthly payment might be larger after you consolidate. If you’re having a hard time making it to the next paycheck, you’d be putting yourself at risk of racking up more credit card debt again.
According to Tayne, many people count on a tax refund or work bonus to cover costs. The problem, she explained, is that those factors aren’t always within your control. “If they don’t fall into place,” said Tayne, “then you end up in bigger issues.”
Before you commit to a consolidation loan, be sure you can afford the new payments comfortably — otherwise, you risk falling back into debt.
3. Companies that offer to help could make things worse
When you’re looking to consolidate your debt, watch out for businesses that might take advantage of your situation. “They know exactly what buttons to hit on,” said Tayne.
These companies might promise to negotiate with your creditors or reduce what you owe, but they could actually hurt you with unnecessary fees and bad advice. If you want to consolidate your credit card debt with a personal loan, you can do it yourself for free — follow five simple steps.
Still interested in a particular debt relief company? Check out this guide to make sure the business is trustworthy.
4. Your underlying issue might not be resolved
Using credit card debt consolidation as a quick fix could come back to haunt you.
“If you can get to the underlying issue, then you can solve things,” said Tayne. “This isn’t urgent care, where you’re walking into a clinic and getting a prescription for a sinus infection. This is a bigger problem that you need a specialist for, so that when you’re going through the process you come out in a better way.”
In other words, if you don’t address the problems behind why you accrued credit card debt, the cycle could repeat itself later. The real issue often is that people don’t have enough cash flow to sustain their lifestyle, Tayne said. If that describes you, learn how to create a budget you can stick to or pick up a side hustle to earn extra cash.
At the end of the day, remember that your goal is to get out of debt. After weighing the pros and cons of consolidation, choose a method that you know you can commit to and afford.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|