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How does a credit card consolidation loan work?

It’s time to tackle credit card debt head-on.

Author Justin Cupler
Contributing Writer at Tally
Updated: October 2, 2020

Credit card debt can pile up. If it’s something you’ve experienced, you’re not the only one. 

In late 2019, consumer credit card balances rose to $443.96 billion, pushing the average American household credit card balance to a whopping $6,849. Credit card consolidation loans and other debt-payoff methods can help reel in this rapidly spreading issue. 

With so many tools at your disposal, including credit card consolidation loans, you can get your credit cards and other consumer debt in check. But before you start managing these debts, you’ll need to understand what credit card consolidation loans are, how they work and who they work for.  

What is a credit card consolidation loan?

credit card consolidation loan: the word "debt" being erased

A credit card consolidation loan is a personal loan that rolls all your nickel-and-dime credit card payments into one tidy loan. These loans can come from a traditional bank, a credit union, a lender who specializes in credit card consolidation or even peer funding. In some cases, you can also take out a home equity loan to refinance your high-interest debts. 

A credit card debt consolidation loan not only lowers the number of monthly payments you’re sending, reducing the risk of late payments dinging your credit report, but it can also save you time and money. 

Generally, credit card consolidation loan interest rates fall anywhere between 8.31% and 28.81% with an average of 18.56%. That may seem high for a personal loan, but when you consider the average credit card interest rate is 19.02% for new applicants, with some rates above 25%, you can see how a loan can save you some cash.

Here are the pros of getting a debt consolidation loan: 

  • You can package many monthly bills into one loan payment. 
  • You may get a lower interest rate, saving you money.
  • In some cases, you can improve your credit score.
  • You have firm repayment terms.
  • You get a consistent payment structure.
  • You get a fixed-rate personal loan — not an adjustable rate.
  • You have many loan options to pick from.

While they can be helpful, credit card debt consolidation loans are far from perfect. Some of the knocks against them include:

  • You need good credit history to obtain one.
  • You can (ironically) be denied for having too much credit card debt.
  • You may incur sneaky upfront origination fees.
  • Your credit cards may already have a lower interest rate.
  • Your monthly payment may go up due to shorter loan terms.
  • You might be tempted to spend the loan on things other than credit card debt.
  • You may not qualify for the loan amount you need.

When a credit card consolidation loan can help

Credit card consolidation loans can be a sharp tool when you’re looking to slice your debt, but your specific scenario can impact whether or not it’s the right option for you.

If you have several credit card payments and need help keeping up with them

Sometimes, it’s not the overall payment or interest that makes you struggle with credit card debt. It may be just the sheer number of cards you have to pay month after month.

If you have 10-15 credit cards with small balances and struggle to remember all those monthly payments, a credit card consolidation loan may be in order. Of course, this is only if you’re unable to set up monthly autopay — for example, if your income isn’t steady enough.

In this instance, a credit card debt consolidation loan would work for you since it will reduce those 10-15 monthly payments into one monthly bill. If you’re lucky, you may even get a lower interest rate.

If you need help managing your high-balance, high-interest credit cards

Where credit card consolidation loans are at their best is when they can reduce your interest rates, saving you money in the long term.

Maybe you racked up big debt on one or a few new credit cards with 0% introductory APR offers and didn’t pay them off before the promotion ended. Now you have thousands of dollars racked up on credit cards with 27.9% APR. This is where a credit card debt consolidation loan can help the most. 

Even if you land just the average interest rate of 18.56% on a consolidation loan, you will save nearly 10 percentage points in interest. That can add up to hundreds or thousands of dollars over the years. And it gets better if you have outstanding credit and receive offers on the lower end of the interest rate scale. In this case, you may even end up with a significantly lower monthly payment than you had on the credit cards. 

On top of a lower rate, a credit card consolidation loan is a close-ended debt, so you know precisely when you’ll be free from debt’s sticky paws. 

When a credit card consolidation isn’t right

rolls of bills

While credit card debt consolidation can help in some situations, it doesn’t work for everyone. Here are a few scenarios where this type of personal loan is likely not the right choice.

If you want to lower payments on a few low-interest cards

If you have excellent credit, you may have a few credit cards with super-low interest rates in the low- to mid-teens. These are the unicorns of the industry.

With the average credit card consolidation loan falling into the 18-19% range, there’s a good chance you’ll save no money rolling these low-interest cards into a consolidation loan. And even if you do qualify for one of the few low-APR debt consolidation loans available, the fees may gobble up all your interest savings.

If high debt has dinged your credit score

Sometimes, we lose track of our budgets and start swiping our credit cards like it’s free money. Unfortunately, those debt chickens eventually come home to roost in the form of a stack of credit card bills. 

As these credit card bills stack higher and higher, your credit score may be working the opposite way. Now, that beautiful 750 credit score that earned you all these credit cards is in the 500s, and you can barely afford the monthly minimum payments. 

Think refinancing all your credit cards into a credit card consolidation loan will work? You may want to think again, as that low credit score combined with a pile of revolving debt will likely cause you to get rejected for a debt consolidation loan. 

Yes, as backward as it seems, too much credit card debt can prevent you from consolidating that debt. The rationale is the bank sees you as a risk to pay off these cards with the loan and just run them up again. 

Fortunately, there are a few alternatives that may work out better than a credit card consolidation loan. 

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Alternatives to a credit card consolidation loan

If you can’t get approved for a credit card debt consolidation loan or it’s just not the right option for you, there are a few debt consolidation alternatives. Luckily, some of these require nothing but your dedication to getting debt-free — no bank approval needed. 

Debt avalanche

The debt avalanche method is one of the most effective DIY ways to get out of debt quickly while also saving big money on interest. 

This debt-reduction scheme works by rolling all your extra money toward paying off the debt with the highest interest rate and balance first. While paying this debt, you continue making the minimum payments on the rest of your debts.  

Once you pay off the debt with the highest interest rate and balance, you move down to the next highest interest rate and balance. When you step into the next debt, you roll the payment from the previous card on top of the minimum payment for the next card you want to pay off. For example, if you were paying $100 per month on the previous card and $25 minimum monthly payment for the next card, your new monthly payment on that card would be $125 per month. 

You continue this process until you’ve paid off every debt. 

Debt snowball

The debt snowball method is like the debt avalanche, but it differs in terms of what debts you pay first. 

In the debt snowball, you roll all your extra cash toward paying off the debt with the lowest balance first. Once you pay off the first debt, you roll that payment onto the debt with the next lowest balance. You then continue this process until you pay off all your debts. 

The debt snowball won’t save you nearly as much on interest as the debt avalanche method, but the quick gratification of paying off the smaller debts early on can help motivate you.

0% APR balance transfer

The 0% APR balance transfer is a great way to pay off a handful of high-interest credit cards with virtually no interest. This debt-payoff scheme requires you to have a zero-balance credit card with a 0% transfer promotion or the ability to obtain one. 

With that credit card in hand, you can transfer your higher-interest balances onto it and enjoy interest-free payments for however long the promotion runs. Generally, these balance transfer promotions run anywhere from 10-18 months, but some go as long as 25 months. This can give you plenty of time to pay off your debts sans interest.

There are a few downsides to the balance transfer program, though. First, you have a limited amount of time to pay off your debts before interest kicks in. Second, these promotions generally have a 3-4% fee attached to each transfer. So if you transfer $1,000 in high-interest debt onto a 0% interest card, you could incur a $30-$40 charge.   

While that fee may seem steep on the surface, if you were to spend a year paying off that $1,000 balance on a 27.9% APR credit card, you would pay $140 in interest. Using this system can save you $100-$110.

The right credit card consolidation loan for you

man with arms spread open

If you’ve determined a debt consolidation loan is the best way to control your unruly debt, the time to act is now. But don’t rush into this process and stop at the first loan you find. 

Do some rate shopping — getting your credit pulled multiple times for the same type of loan won’t harm your credit — and find the loan with the terms that work for you. 

You may be tempted to jump at the loan with the lowest monthly payment. Be mindful of those sneaky origination fees and the total interest you’ll pay over the course of the loan. 

With a firm understanding of debt consolidation loans and a careful eye while shopping for your loan, you can start your path toward being debt-free.

Save money, manage your cards and pay down debt faster!

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