What Is a Credit Card Consolidation Loan?
A credit card consolidation loan can help you reorganize your credit card debts so that you can pay them off faster. Find out how this loan works and if it could be a good option for you.
August 11, 2022
This article is provided for informational purposes only and should not be construed as legal or investment advice. Always consult with a professional financial or investment adviser before making investment decisions.
If you're carrying a lot of credit card debt and struggling to make your monthly payments, a credit card consolidation loan may be able to help you get back on track financially. But what exactly is a credit card consolidation loan? How does it work, and how do you apply for one? Read on to find out.
How does a credit card consolidation loan work?
Debt consolidation is a debt management strategy that entails rolling all of your debts into one loan, leaving you with just one payment to make.
If you have multiple high-interest credit card debts, for example, a credit card consolidation loan allows you to roll them into one loan with a fixed rate, term and a single monthly payment.
What are the benefits and drawbacks of a credit card consolidation loan?
Save money on interest
If you have a good credit score, you can often get a lower interest rate than the one you are currently paying on your credit card. This could save you money by reducing the total amount of interest on your debt.
Pay off debt faster
A credit card consolidation loan could also help you pay off what you owe faster, especially if you can get a lower rate. That’s because a larger portion of your payments will be going toward the principal (the original amount borrowed) rather than interest.
Easier tracking and management of payments
Another great benefit of consolidating credit card debt is that it can simplify your life. You’ll only have one monthly payment and one due date to keep track of. This can be easier to manage than multiple credit card payments and due dates.
Lower monthly payments
A lower interest rate combined with a longer repayment period can reduce your monthly repayments and make them more manageable.
However, don't commit to a longer repayment period than is absolutely necessary when taking out a credit card consolidation loan. Otherwise, you risk paying a higher amount of interest over the term of the loan, even if you can get a low interest rate.
Potentially higher interest rate
If your credit is in bad shape, you probably won't be able to get the best interest rate on a credit card consolidation loan. This can cost you more money in interest over the life of the loan.
Some credit card consolidation loans come with hidden fees that can cancel out any potential interest savings. Before you sign up, carefully read the fine print to understand the loan’s true costs.
When can a credit card consolidation loan be a good option?
If you are currently carrying high-interest credit cards
High interest rates on credit cards mean a higher cost of using credit. Consolidating your high-interest balances into a loan can help lower the cost of your debt and make your monthly payments more manageable.
If you have a good credit score
Credit card debt consolidation works best when you can get a lower interest rate than the one you are currently paying on your cards. This is usually only possible if you have a good credit score.
When might a credit card consolidation loan not be a good option?
If you have poor credit
If you have bad credit, you might end up with a high interest rate, as mentioned earlier, and potentially higher and unaffordable monthly payments.
If you don’t plan on changing your spending habits
Most people experience a great sense of relief when they see their monthly payment drop after consolidating their loan. Unfortunately, this can encourage further spending and possibly lead to a worse debt situation than before.
Only consider a credit card consolidation loan if you are self-disciplined and have made a firm commitment to keep away from unnecessary spending and debt in the future.
If you only have a small debt load
If you only have small credit balances, any potential interest savings from debt consolidation are likely to be negligible. The effort of researching and applying for credit card consolidation loans might simply not be worth it.
How do you get a credit card consolidation loan?
Here’s a step-by-step guide to applying for a credit consolidation loan.
Check your credit score
Start the credit card consolidation process by ordering a copy of your credit report and checking your credit score. In some cases, your credit report might have errors that could be dragging down your score. This may have an impact on the interest rate you get, so review your report and dispute any errors or inconsistencies that you find.
Use a debt consolidation calculator
A debt consolidation calculator can help you determine whether it makes sense to consolidate your credit card debt. You can play around with the numbers, such as the loan term and interest rate, to see how much it’ll cost you overall, what your monthly payments will be and the potential interest savings.
Shop around and compare providers
Shopping around and comparing the rates, terms and qualification criteria from different providers is the optimal way to find the best loan deal for your circumstances.
You can use comparison websites or reach out to providers directly and ask for a quote. When asking for quotes, confirm that the provider will only do a soft inquiry. Unlike hard inquiries, soft credit report inquiries don’t affect your credit score.
Apply for the loan
Once you’ve evaluated your options and settled on a provider, you can go ahead and apply for the loan. You may be required to provide documents such as proof of ID (e.g., a driver's license or passport), proof of address, bank statements, and recent pay stubs as part of your application, so make sure you have them on hand.
If your application is approved, the money will either be disbursed to the various credit companies you owe or deposited in your bank account for you to pay off your balances yourself, depending on the loan provider.
Start repaying your loan
Once you’ve paid off your previous debts, it’s time to focus on repaying your loan. Remember that missed payments can lead to late fees and leave a negative mark on your credit report. Make arrangements to have payments withdrawn automatically from your checking account so that you never miss a payment.
Alternatives to a credit card consolidation loan
Balance transfer credit card
Balance transfer cards offer individuals a 0% APR for a specific promotional period (which can last anywhere from 6 to 18 months). That means that there will be no extra interest on your debt during this period. If you are fully committed to debt repayment, you can pay off your entire debt during this promotional period.
Keep in mind that once the promotional period ends, you’ll have to pay the card’s standard interest rate on the remaining balance.
Credit counseling agencies
Credit counseling agencies may also be worth a shot when looking to pay off your credit card debt. The agencies can review your budget, your income, and your debts and make practical suggestions on how to approach your debt.
They might also be able to negotiate a new, lower repayment plan with creditors on your behalf. You’ll then just need to send them one payment each month, which they’ll distribute to your creditors.
If you conclude that a credit consolidation loan could be a good option for you, Tally† might be able to help. Tally† is a finance app that provides an easy way for qualifying Americans to consolidate high-interest credit card debt to save money on interest and pay them off faster.
† To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% – 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 – $300.