Credit Card Debt Consolidation Loan Guide

A comprehensive guide to using a loan to consolidate credit card debt on your own.

Debt consolidation doesn’t always require the assistance of a third-party organization like a credit counseling agency. There are some do-it-yourself debt consolidation options that allow you to consolidate debt on your own without anyone else stepping in, such as taking out a personal credit card debt consolidation loan.

The information below is designed to help you understand how to use a personal debt consolidation loan so you can decide if it’s the right choice for you. If you have questions or you’d like an expert opinion on your best path to get out of debt, we can help. Call Consolidated Credit today at or complete an online application to request a confidential debt and budget evaluation from a certified credit counselor at no charge.

Step No. 1: Knowing when it’s time to consolidate

In an ideal world, you can make a plan that allows you to reduce credit card debt within your budget simply by making larger payments. In other words, instead of paying just the minimum requirements, you pay your debt off in larger chunks one credit card at a time.

What you don’t want is for that method to take too long. Otherwise, you’re just throwing away money on interest charges. When debt levels get high on a credit card, the high interest rate means that about 2/3 or more of each monthly payment you make goes to paying off accrued monthly interest charges rather than the debt.

So you can use these three questions to decide if it’s time to consolidation:

  1. Is your debt reduction plan going to take longer than 3-5 years?
  2. Are you spending more than 25% of your monthly income in an effort to reduce your debt quickly?
  3. Are interest charges eating up the majority of each payment you make?

If the answer is “yes” to any of those three questions, then it may be time to consider debt consolidation.

Step No. 2: Deciding a debt consolidation loan is the right option

Once you know you need to consolidate, the next step is deciding if a personal credit card debt consolidation loan is the best of the three options available for consolidation. Here is what you really need to consider:

  1. A credit card balance transfer allows you to consolidate debt, but the attractive 0% APR on balance transfers that card issuers offer only applies for an introductory period. So if you can’t pay off your total debt in full within that time, this usually isn’t the right option. Also, be aware that there’s usually a 3% transfer fee for each balance moved.
  2. A debt consolidation loan gives you a rate at less than 10% if you have good enough credit to qualify. It also has the advantage of offering fixed monthly payments that are easy to plan around in your budget.
  3. A debt management program through a credit counseling agency is usually the best option if:
    1. You have less than perfect credit and can’t qualify for low rates (no higher than 10%) on DIY.
    2. You have too much debt to pay off quickly using the other two options – a good rule of thumb if that you should be able to pay off everything in five years of less.

So generally if you have too much debt to eliminate during the introductory period on a balance transfer credit card but not enough to warrant a debt management program- and you have good credit – then qualifying for a debt consolidation may be your best option.

Step No. 3: Securing the best consolidation loan for your needs

You shop for a debt consolidation loan the same way you shop for any other kind of loan. The amount of the loan will be however much it takes to pay off your credit card balances and any other unsecured debt you want to eliminate, such as medical bills. Start by comparing rates online to rates offered through your bank or credit union. You’re aiming for two things when you shop for the loan:

  1. You want the lowest interest rate possible
  2. You want a term that provides monthly payments you can comfortably afford on your budget

Again, you really want a term of 60 months or less. That would get you out of debt completely in less than five years. If you can’t afford the monthly payments on a loan with that short of a term, then you may want to consider another option like credit counseling.

Step No. 4: Loan qualification and disbursement

The lender you choose will base your loan approval largely on your debt-to-income ratio. This measures your total monthly debt payments relative to your total monthly income. Ideally you want to keep your DTI at less than 36% to ensure you can maintain stability, but lenders approve loans as long as your ratio is 41% or less.

Now there is an interesting Catch 22 that happens with credit card debt consolidation loans that may mean you’ll only be approved with direct disbursement to your creditors. Here’s why:

  1. The goal of your consolidation loan will be to pay off your credit card balances in full
  2. There’s a strong possibility when you consolidate that your DTI will be less than 41% after the credit cards are paid off, but not before – in other words, you can afford the loan but only if and when your credit cards are zeroed out.
  3. In this case, the lender will require that the money be sent directly to your creditors instead of sending it to you to pay them off. This is known as direct disbursement.

Basically, your lender will cut checks to each of your credit card companies for the current balance amount on each account. Any money leftover is given to you. This ensures that your credit cards are paid off, instead of the bank just giving the money to you and you decide to use if for something else.

Step No. 5: Making sure your accounts clear correctly

One thing to watch out for when you pay off your credit cards with a loan is that if the lender sends the checks in the middle of a billing cycle, you could be assessed interest charges on your next bill even though you eliminated your debt in-full.

This is because credit card issuers apply interest rates based on the “balance subject to interest charges.” Instead of charging interest on the amount owed at the end of the month, creditors often consider the average daily balance you carried throughout that billing cycle. So if you pay off your debt in-full in the middle of the month, then the balance subject to interest charges may not be zero, in which case interest charges will be assessed.

So make sure to check your statements carefully once you’ve consolidated. If interest charges are applied happens, just call your creditors and ask them to remove the interest charges since you did the right thing and paid off your debt in full. Most creditors will be willing to waive those charges since you’re being responsible, especially if you’ve been a good customer who always pays on time in the past.

3 key warnings for credit card debt consolidation loans

There are three key warnings that can prevent you from having trouble when you use a personal debt consolidation loan:

Don’t use a secured debt consolidation loan.

Qualifying for a secured loan with a lower credit score is easier than qualifying for the unsecured debt consolidation loan. “Secured” means the loan is backed up by some kind of collateral. Usually for personal loans that collateral is your house. So you use a home equity loan to pay off your credit cards. But that’s a risky bet and it’s usually not worth the potential threat of foreclosure that you get into using a home equity loan.

Remember, credit card companies and collectors can call and threaten, but they can’t actually take your property without a court order. However, if you default on a home equity loan you could lose your house. So you typically don’t want to trade in unsecured debt for secured debt because you’re taking on too much unnecessary financial risk.

Don’t consolidate if the interest rate is over 10%.

If you qualify for a debt consolidation loan, but only at an interest rate of 12% or 13%, then it’s not going to pay off your debt as efficiently as you need it to do. While that 13% rate may be lower than your high-interest credit card rates, it’s still not low enough to provide the full benefit you need. You won’t be able to eliminate your debt as efficiently as possible, so another option like a debt management program may be better in your situation

Don’t start charging when you’re still paying off the loan.

The goal of consolidation was to eliminate your credit card balances so you could balance your budget. If you start charging and running up your balances again before you’ve paid off the loan in-full then you’ve actually made your debt problems worse instead of better. You’ll be fine for a few months until the credit card bills start to pile up again as your balances go back up.

If you want to use credit cards strategically to earn rewards or keep your credit in good standing, just make sure that you’re only charging what you can afford to pay off in-full at the end of each billing cycle. Otherwise, interest charges are reducing the benefit of any credit card rewards you earn and those bills on top of the loan could become unmanageable in your monthly budget.

If you do start charging and you get into trouble, it’s not the end of the world but you may need another solution to find debt relief. Be aware that it’s completely allowable to include a personal debt consolidation loan in a debt management program. So if your do-it-yourself debt consolidation plan fails, you still have options to find debt relief.

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