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The right time to consolidate credit card debt: Learn about eligibility and options

If you’re looking to lower your interest rate or simplify your payments, you may want to consolidate credit card debt.

Chris Scott

Contributing Writer at Tally

July 21, 2020

If you fall into credit card debt, it can be difficult to get out.

A recent study from CNBC found that 55% of adults who own a credit card in the U.S. are also dealing with credit card debt. If you fall into this category — and carry balances on more than one card — you can end up stuck in a cycle of compounding interest. You may be able to make minimum payments on the cards, but the outstanding balance continues to build, collecting interest in the process. 

Credit card consolidation could help you to escape this cycle. We'll cover how to consolidate credit card debt and help you determine whether it’s the right debt management tool for you. 

What is credit card debt consolidation? 

Credit card debt consolidation is when you take multiple debts — often with high interest rates — and combine them into a single payment with a lower interest rate. 

Debt consolidation can be an effective tool if you're looking for lower interest rates as you pay down debt. However, it can also be useful if you don't like tracking different due dates and making multiple monthly payments. Consolidating debt can give you more control over your financial situation. 

Although consolidation options are typically advertised to people who carry debt across multiple credit cards, it's also an option if you only have a single, high-interest card and want a lower rate. By having a lower rate, you'll reduce the amount of high-interest debt you accumulate, allowing you to become debt-free more quickly. 

Am I eligible for credit card consolidation? 

Everyone's financial situation is different, so consider speaking with a credit counseling agency to determine whether you're eligible for consolidation. Below are some of the criteria a credit counselor will consider when determining your consolidation eligibility. 

Your credit score 

The single most important factor in determining whether you can consolidate debt is your credit score. You'll need a FICO Score of at least 670 to qualify for the best consolidation tools. For reference, a score of 800 is considered perfect

If your credit score is lower than 670, you may experience higher interest rates on your repayment plan. For instance, people with a score ranging from 720 to 850 can currently secure a rate around 5.5%, while those with scores below 620 can expect an APR as high as 27%. 

You need to determine whether the proposed interest rate is higher than what you're already paying and if it's worth paying the balance transfer fee to transfer the debt. 

FICO considers multiple factors to determine your credit score, including your payment and credit history and your credit utilization ratio. Your credit utilization ratio is a number that indicates how much of your available credit you are using. A good ratio is considered anything less than 30%.

You can view your FICO Score for free through Experian

If you have bad credit, identify the areas where you need to improve. Your credit report will show what’s bringing down your credit score.You can request copies of your credit score for free from the three major credit reporting agencies: 

Making on-time payments each month is an excellent way to start boosting your score. Improving your credit score could make you eligible for consolidation loans with better rates in the future. 

Your current debt level 

Consolidation is an effective debt relief strategy only if your debt is still at a manageable level. You need to demonstrate that you can make, at the very least, your current minimum payments. 

The only way a credit agency would consider waving this minimum payment requirement is if you can clearly demonstrate that consolidating will allow you to start making your minimum payments. 

Your financial situation 

Credit agencies look closely at your financials and monthly budget to determine what, if any, consolidation options would work for you. If you move multiple balances to a single debt consolidation loan or credit card, your monthly payment may be higher than what you were previously paying. 

Credit card companies typically require a minimum monthly payment of 1% to 4% of your total balance. By consolidating everything in one place, the balance of what you owe will end up higher. 

The main difference is that your interest rate will be lower. So, you'll need to demonstrate that you can continue to make the higher minimum payments now and in the future. 

Strategies to consolidate credit card debt 

If you think you're a good candidate to consolidate debt, there are a few ways you can do so. Here's a look at each of your options.

Balance transfer credit cards 

Balance transfer credit cards are perhaps the most well-known form of debt consolidation. Credit card companies offer balance transfer cards, which allow you to move an existing balance from one credit card to another. For instance, if you have a Discover credit card and a Capital One credit card, you could move them both to an American Express balance transfer card. 

Balance transfer cards tend to offer 0% APR for the first 12 to 18 months, allowing you to pay off your credit card balance interest-free. 

Let’s say that you have $25,000 in debt across five credit cards, with an average APR of 23%. If you pay $750 a month, you’ll pay your debt off in 54 months, paying $15,239.44  in interest for a total of $35,239.44. 

But if you transfer the same $25,000 in debt to a balance transfer card with an 11% APR and make the same $750 monthly payment, you’ll pay a total of $29,971.10 with only $4,971.10 in interest over the course of 40 months. 

Be mindful of the repayment terms, as the APR on a balance transfer card can skyrocket after the introductory period is over. If you don’t pay off your entire balance before the introductory period ends, you may get stuck with a higher APR than you were paying originally.

The other thing to consider with balance transfer cards is that you'll likely pay a fee when you move a balance from one card to another. Balance transfer fees tend to range from 3% to 5%. The lower your credit score, the higher these rates are likely to be. If you have high balances and poor credit, it may not be worth it to transfer the balance because of these fees. 

Using the example above, let’s again say that you have $25,000 in debt and the balance transfer fee is 4% ($1,000). The cost of the balance transfer fee and 11% APR is still less than the amount you would pay otherwise so it's worth it to make the transfer.

Credit card consolidation loan 

An option similar to a balance transfer card is a credit card consolidation loan. This unsecured loan is designed specifically to help manage credit card debt. Like balance transfer cards, they come with low APRs. 

However, credit card consolidation loans also come with fixed interest rates, and you can generally pre-qualify without harming your credit score. These loans are difficult to obtain if you have a poor credit score. 

Home equity loan 

With this loan option, you can borrow against your home equity available as part of your debt management plan. A home loan tends to offer a lower interest rate than a personal loan because it's backed by collateral: your home. 

However, because you're putting your home up as collateral, you're taking a tremendous risk. If you were to default on your debt, lenders could foreclose on your home. Additionally, the closing costs associated with home equity loans tend to be expensive. 

Personal loans 

Personal loans won't necessarily offer the lowest rates, but they do offer fixed rates. There are defined loan terms, typically lasting between three and five years. 

You may find it easier to secure a personal loan since it doesn’t require any collateral. These loan offers are widely available through: 

  • Banks

  • Online lenders

  • Credit unions 

Personal loans often come with an origination fee, which tends to be a percentage of the loan amount. You'll need to pay the origination fee upfront. 

Line of credit 

A line of credit is a flexible loan that gives you access to a predetermined amount of money on a regular basis. Each time you pay off the balance on your line of credit, the full amount becomes available for you to borrow again — this is known as a revolving line of credit.

With a revolving line of credit, you only accumulate interest on the amount of credit you utilize.

Tally is an example of a revolving line of credit designed to help you better manage credit card payments. Similar to other credit card consolidation options, Tally allows you to combine all your cards into a single monthly payment. 

Tally gives you a revolving line of credit and uses it to pay all of your cards for you. All you have to do is pay back Tally once a month. 

Climb out of credit card debt 

If you have credit card debt, you may feel overwhelmed by trying to pay off your balance while managing different repayment terms and due dates. With a decent credit score, you may qualify to consolidate your credit card debt. 

There are several ways to consolidate debt, ranging from balance transfer cards to lines of credit. If you have a credit score greater than 650, you may find loan options with lower rates, that can lower your interest payments and help you better manage your debt. 

Consolidating credit card debt can not only make it easier to manage your finances, but it can also reduce the amount of interest you pay in the long run. Be sure to choose the payment tool that best suits your current financial situation.