10 Warnings When Consolidating Credit Card Debt
Don’t let bad decisions during consolidation put your stability at risk.
Consolidating credit card debt is an invaluable way to solve challenges you may be facing with high-interest debt. You can lower your interest rates and your monthly payments, meaning you can get out of debt faster even though you pay less each month because you’re managing and eliminating the debt more efficiently. However, consolidation is not a foolproof solution. When it’s not done correctly, it can actually lead to more financial trouble than what you had when you started.
The ten points below can help you use a credit consolidation program successfully while avoiding common pitfalls that often catch people off guard. If you’re thinking of consolidating credit card debt and you need an expert opinion to make sure it’s the right choice for you, we can help. Call Consolidated Credit today at or complete an online application to request a confidential debt and budget analysis from a certified credit counselor at no charge.
Warning No. 1: Stop spending so you stop accruing debt
This is the number one mistake people make when they consolidate. Instead of balancing their budget so they can live without any reliance on credit, debtors who don’t use consolidation correctly continue to use their credit cards in order to get by every month. As a result, they continue adding to their debt load instead of reducing it.
When you consolidate your credit cards, no matter which option you use, stop spending on credit until you’ve at least eliminated the consolidated debt load. Otherwise, you’re just generating more debt and more bills. You’ll eventually get back into a situation where your monthly debt payments are taking up too much income and making it impossible to maintain stability.
Warning No. 2: Only do DIY if you have good or excellent credit
If you’re like most people, you’d probably prefer to solve your debt problems on your own so you don’t have to tell anyone else about the bind you’ve gotten into. However, do-it-yourself debt consolidation only works if you have a high enough credit score to qualify for the low interest rates you need to consolidate your credit card debt successfully. If you consolidate at an interest rate that’s too high, you can’t pay your debt off efficiently, which is the primary goal of consolidating credit cards in the first place.
You want to consolidate at an interest rate that’s as close to zero as possible. So if you’re doing a credit card balance transfer you want to aim for a card with a 0% APR introductory period. If you use a personal consolidation loan, then ideally the interest rate should be around 5% and at most you want it to be no higher than 10% to consolidate effectively.
Warning No. 3: Don’t secure unsecured debt
This often happens with people who are trying to consolidate credit card debt on their own with a lower credit score. If you can’t qualify for an unsecured debt consolidation loan at the low interest rate you need because your credit score isn’t high enough then you may think it’s a good idea to apply for something like a home equity loan instead. You can qualify for a low rate with a lower credit score because the debt is secured using your home as collateral. This is a bad idea.
Remember that credit cards are unsecured debt, which means as much as collectors may threaten and try to scare you, they can’t take your property or even garnish your wages without a court order. On the other hand, if you default on a home equity loan then you could face foreclosure. It’s not worth the risk just to pay off your credit cards. There are better ways.
Warning No. 4: Don’t be afraid to ask for help
The best option for consolidating debt with a low credit score is to go through credit counseling to see if you qualify for a debt management program. This allows you to roll all of your debts into a single monthly payment while reducing or eliminating interest charges. You get the low rates because the credit counseling agency negotiates with creditors on your behalf.
So rather than securing unsecured debt with a home equity loan, you should look into consolidation through a credit counseling agency first.
Warning No. 5: Beware of fees
Hidden fees add cost and can mean it will take longer for you to eliminate everything you owe. Most debt solutions are going to cost something, but you need to know what that cost is exactly before you being consolidating credit card debt or anything else. For example, a balance transfer credit card usually has a 3% fee for every balance you move to that card; it can get expensive when you have big debts or multiple debts spread out between different cards.
For debt management programs, the fees are set based on your budget and what you can afford. You can find more information about fees with this helpful Ask the Expert video.
Warning No. 6: Don’t lose steam and slip backwards
When people first consolidate their credit cards, they’re excited to have a solution and start the journey towards zero. Still, as time passes, some people get tired of budgeting and cutting back, so after a few months they slip back into bad spending habits. This can have a negative impact on your ability to avoid bankruptcy and your ability to preserve your credit score.
On a debt management program, people commonly drop off the program at around 6 months. However, keep in mind that if you leave the program, your original interest rates and even penalties that were removed can be reinstated. You have to stick with the program even if it seems tedious.
Warning No. 7: Consolidation is not settlement
Don’t get commercials you see advertising “settle your debt for pennies on the dollar” confused with consolidation. Consolidating credit cards – even with a debt management program – and going through a debt settlement program are two totally different things.
ANY consolidation option you use will pay off everything you borrowed in a way that works for you budget – you just go about it with lower interest rates so you save money and lower monthly payments so you don’t struggle to get by. That’s completely different from settling your debt for less than you owe. Consolidation helps you keep your credit score from dropping as long as you execute your plan correctly. Settlement ALWAYS hurts your credit score.
Warning No. 8: Be careful with new financing
With do-it-yourself debt consolidation, there is nothing preventing you from seeking financing – whether it’s for a new home or car, or even a new credit card. You’ll be able to open any new accounts you need and can get approved for loans so you can achieve your financial goals. In fact, it may be easier to get approved, since consolidation will do at least part of the work in fixing your debt-to-income ratio. If you consolidate through a debt management program, your credit cards will be frozen and you can’t open new credit card accounts, but YOU CAN get financing for a mortgage or auto loan while you’re enrolled in the program.
However, just because you can get financing, it doesn’t mean that you should. Any changes to you debt load while you’re working to eliminate debt can be risky. It doesn’t mean you shouldn’t get a loan if you want to buy a new home or car, but you should proceed with caution. When in doubt, call a certified credit counselor and ask. The advice is free and you can get an expert opinion on your situation so you know you’re making the right choice.
Warning No. 9: Check your credit once the debt is eliminated
Once you’ve completed your consolidation plan and eliminated all of your credit card debt successfully, you need to check your credit report to make sure it reflects this better financial state you achieved. Creditors send the credit bureaus updates when an account has a change, but information can sometimes be outdated – meaning you won’t immediately enjoy the credit benefits of eliminating your debt in-full.
Check your credit report for the following:
- Make sure account information have been updated to reflect zero balances
- If you go through a debt management program, make sure the credit history of each accounts reflect that you made the payments on time every month
- If you paid off a collections account, make sure it is closed; if you negotiated with the collection agency to have that account removed in exchange for repayment, make sure it is
- Make sure all of your account statuses are now listed as current.
If you find any issues, make disputes by following the credit repair process. Once the updates are verified, any outdated information will be adjusted to reflect your better financial standing.
Warning No. 10: Learn from your mistakes
You don’t want to be back in this situation six months to a year from now because you started overspending and relying too much on your credit cards. You don’t get penalized for consolidating or even consolidating multiple times, but financial distress is something to be avoided.
Now that you’re out of debt, create a budget that allows you to reserve credit cards for strategic use and emergencies only. And on that topic, establish an emergency savings fund so you can cover unexpected expenses without pulling out a credit card. Keep an eye on your credit card debt ratio, too. Credit card debt payments should take up no more than 10% of your monthly income. If you start to spend more than 10% on debt payments, it means you need to cut back. Stop charging and take steps to reduce your debt before you get into a situation where you need to consolidate again.