Finding the best way to consolidate during a financial crisis.
When regular monthly payments aren’t working to pay off your debt, credit card consolidation could be an effective solution. You combine all your credit card debt into one monthly payment at the lowest interest rate possible. You can get out of debt faster and save money on interest charges, and it may lower your monthly payments, too.
However, credit card debt consolidation is not a silver bullet. It won’t work in every financial situation for every consumer. What’s more, if it’s used incorrectly or in the wrong circumstances, it can make a challenging situation with debt even worse.
“Credit card consolidation can be an incredibly powerful tool that consumers can use to get out of debt,” says Gary Herman, President of Consolidated Credit. “But it’s critical to make sure it’s the right fit for your financial situation before you consolidate. You also need to know why some credit consolidation tools have become less effective this year. Consolidated Credit can help you do that.”
This guide helps you understand how credit card consolidation works and how to avoid common pitfalls that can lead to trouble. We’ll also help you understand how the current financial crisis may affect you if you want to consolidate. If you have questions or want to find the best way to consolidate in your situation, call us at (844) 276-1544.
What is credit card consolidation?
Credit card consolidation refers to any solution that takes multiple credit card balances and combines them into a single monthly payment. The primary goal is to reduce or eliminate the interest rate applied to the balance. This makes it faster and easier to pay off credit card debt. Instead of wasting money on interest charges, you focus your money on paying off the principal—that’s the balance you actually owe. In many cases, you can get out of debt faster, even though you pay less each month. Credit card consolidation essentially gives you a more efficient way to pay off your debt.
Options for credit card consolidation
There is more than one way to consolidate credit card debt—in fact, there are three basic ways to do it. Two are do-it-yourself and involve taking out new financing to pay off your existing credit card balances. The second takes professional help. You set up a repayment plan through a credit counseling agency. But you still owe your original creditors.
A credit card balance transfer consolidates credit card debt by moving your existing balances to a new balance transfer credit card. These cards offer 0% APR introductory rates on balance transfers, giving you a limited time to pay off debt interest-free.
With a debt consolidation loan, you take out an unsecured personal loan at a low-interest rate. You use the funds from the loan to pay off your credit card balances. This leaves only the low-interest loan to repay. There is also a secured version of this where homeowners borrow against their home equity, but that can be risky.
A debt management program is basically a professionally-assisted debt consolidation program. You set up a repayment plan you can afford with the help of a certified credit counselor. Then they work with your creditors to reduce or eliminate interest charges and stop penalties. You still owe your original creditors. So, with this option, you don’t get new financing. The benefit is that you don’t need good credit to qualify.
Identifying the best way to consolidate credit card debt out of these three options depends on your financial situation. That includes how much you owe, your credit score, and how much money you have available for monthly payments.
Step-by-step instructions for credit card debt consolidation
Now that you know what your basic options are to consolidate, let’s look deeper at how each one works. This will help you decide on the best way to consolidate based on your unique financial situation.
Assessing your financial situation
This table can help you understand how to choose the best consolidation options for your needs.
Balance Transfer
Debt Consolidation Loan
Debt Management Program
Credit score needed
Very good-excellent (FICO 740 or higher)
Good-excellent (FICO 670 or higher)
Any score is eligible, including bad
Recommended debt range
Less than $5,000
Less than $25,000
$10,000 to $100,000+
Interest rate
0% APR introductory rate
Target less than 10% APR
0-10%, on average
Monthly payments
As high as possible to pay off the balance quickly
Monthly payments may be lower than your total payment now
Total credit card payments reduced by up to 50%
How to consolidate credit cards with a balance transfer
Balance transfers are the best option for credit consolidation when you have excellent credit and a limited amount of debt. Balance transfer cards offer 0% APR for a limited time after you open the account. The higher your score, the longer the 0% APR period.
The goal is to pay off your balance before the 0% APR period ends. That’s because once the 0% APR period ends, the regular APR for balance transfers will apply. Depending on the terms of your card, the rate could be right back up where you started.
Shop for a balance transfer card that offers low fees and the longest 0% APR teaser rate; teaser rates usually apply for 6-24 months, depending on your credit score.
Apply for the best card that you find. Only apply for one card, because filing multiple applications can decrease your credit score.
Once you open the account, begin transferring your balances. You can call customer service or set them up online. You’ll need the account numbers for all balances you wish to transfer.
Be aware that there will be a fee applied for each balance transferred. Fees range from $3 per transfer to 3% of the balance transferred.
With your balances consolidated, quickly pay down your debt. Ideally, you want to pay off the full balance before the teaser rate expires. So, divide your total balance by the number of months you have the teaser rate.
For example, let’s say you owe $3,000 on three accounts. You open a balance transfer card that offers 0% APR for 12 months with a fee of $3 per transfer. You’d pay $9 to transfer the three balances, giving you a total balance of $3,009. To pay that balance off during the introductory period, you’d need to make payments of at least $250.75 per month.
How to consolidate credit card debt with a personal loan
Using a loan to consolidate credit card balances is another DIY option you can use if you have good credit. You take out a loan at the lowest interest rate possible and use the funds you receive to pay off your credit cards. This leaves only the loan to repay.
This is often a good way to consolidate credit card debt if you want lower monthly payments, but only if you have good credit. Depending on the term you choose, you can significantly reduce how much you pay each month. But you still get out of debt faster than you would with traditional payments thanks to the low APR.
Shop around for the right debt consolidation loan.You want to aim for low APR, low fees, and a term that will give you monthly payments you can afford.
When you find the best loan for your needs, you apply. Only apply for one loan, because applying for multiple loans at once will hurt your credit score.
Choose a term that offers monthly payments you can afford. A longer term means lower monthly payments, but higher total costs. A shorter term will reduce total costs, but it means higher monthly payments.
Once approved, the funds are disbursed to pay off your credit card balances. In some cases, the lender will give you the money to disburse to the credit card companies. In others, they’ll pay your creditors directly.
Pay off the loan with fixed payments. If the loan doesn’t have any early repayment penalties, you can also make extra payments. For instance, pay off a big chunk of the debt with your next tax refund.
Consolidating credit card debt through a debt management program
If you can’t consolidate credit card debt on your own—either because you have a low credit score or too much debt for a DIY solution—then you need to call in the professionals.
Contact a nonprofit consumer credit counseling organization for a free debt evaluation. A credit counselor will review your debts, credit, and budget to see if you can use do-it-yourself solutions. If not, as long as you have the ability to make monthly payments, you can usually qualify for a DMP.
Your credit counselor will help you find a payment that works for your budget.Set up and monthly administration fees will be rolled into this payment. Fees are capped at $79 nationwide and set based on state regulations where you live; fees average $49.
Then the credit counseling team gets to work and calls your creditors. They work with your creditors to reduce or eliminate interest charges and stop penalties that may be getting applied to your debt.
Once all your creditors agree to accept payments through the DMP, your plan starts.You make one payment to the credit counseling agency each month. They distribute the money to your creditors as agreed.
You still owe your original creditors.The credit counseling agency is basically there to be your advocate and help ensure you can stick with the program.
During a debt management program, all credit card accounts you include will be frozen when you enroll. You won’t be able to apply for new accounts during the program. But this can be beneficial because it helps you break any credit dependency that you’ve developed. The credit counseling team also helps you set a budget, so it’s easier to live credit-free.
Not sure which consolidation option is right for you? Talk to a certified credit counselor for a free, no-obligation debt evaluation.
A real example of credit consolidation
Credit cards have relatively high interest rates compared to other types of debt. Credit consolidation solutions allow you to lower the interest rate applied to the balance. As a result, more of each monthly payment gets applied to the principal balance. This allows you to get out of debt faster, save money on interest charges, and—in many cases—lower the monthly payment.
Here’s an example of how it works when you use a debt management program to consolidate. Let’s say you have four credit cards.
Current Balance
Interest Rate (APR)
Monthly Payment
Credit card 1
$4,002
20%
$160.08
Credit card 2
$3,375
17%
$135.00
Credit card 3
$4,846
21%
$193.84
Credit card 4
$3,475
14%
$139
Total current balance: $15,698
Average interest rate (APR): 18%
Total monthly payment: $627.92
Estimated time to pay off total balance: 11 years, 1 month
Total estimated interest charges: $8,912.98
Then you consolidate the debt with a debt management program. The credit counseling team works with your creditors, who agree to reduce the interest rates applied to your balances. They also agree to accept reduced monthly payments.
Current Balance
New Interest Rate (APR)
New Monthly Payment
Credit card 1
$4,002
8%
$81
Credit card 2
$3,375
7%
$75
Credit card 3
$4,846
6%
$85
Credit card 4
$3,475
1.9%
$62
Total current balance: $15,698
New average interest rate (APR): 5.73%
New monthly payment: $303
Time to pay off total balance: 4 years, 10 months
Total estimated interest charges: $2,459.65
In this example, consolidation would:
Lower your total monthly payments by $324.92
Allow you to get out of debt six years and three months sooner
Save you $6,453.33 in interest charges
You still pay back the full balance owed, but you do it in a more efficient way by minimizing interest (APR). Consolidation lowers your monthly payments, the number of payments you need to make to become debt-free, and the total interest charges.
While balance transfers and debt consolidation work differently, the result is the same. You still minimize interest, combine your debts into one monthly payment, and enjoy the same benefits that you see in the example above.
If you have questions about debt consolidation or need help finding the best way to consolidate, talk to a certified credit counselor for free.
10 things to watch out for when you consolidate
Using credit card consolidation to become debt-free takes the right strategy and discipline. You need to make sure that it’s the right fit for your situation and then follow through. Heeding these warnings can help you make sure that credit consolidation will be a successful solution for you. Always consider your financial situation carefully before you consolidate. If you’re not sure if consolidation is right for you, call (844) 276-1544 to receive a free evaluation from a certified credit counselor.
10 Warnings to Heed When You Consolidate Credit Card Debt
These are the biggest pitfalls that consumers run into when they consolidate credit card debt.
The biggest mistake people make after consolidating credit card debt is that they don’t stop making new credit card charges. If you’re trying to pay off debt, you need to focus on elimination. New charges just set you farther back from your goal—it’s like two steps forward, one step back.
A Consolidated Credit client named Carol ran into this problem when she consolidated on her own using a balance transfer credit card. She used the card to consolidate her debt, but she hadn’t balanced her budget. As a result, she ran up new balances quickly.
The right way: Before you consolidate, you need to set up a household budget. The goal is to cover all your bills and necessary expenses with income. This helps you avoid relying on your credit cards to cover everyday needs. If you can’t cover all your daily expenses without credit, then consolidating your debt has a higher chance of failure.
For consolidation to be effective, you need to reduce or eliminate interest charges applied to your debt. Otherwise, you don’t generate the cost savings you need for this to be an effective way to eliminate your balances. This means you need at least a good or excellent credit score to qualify for do-it-yourself debt consolidation at a good, low-interest rate.
If you don’t have good credit and you try to do-it-yourself, the rate you will qualify for may be too high to provide the benefit you need. Interest charges will eat up every payment you make, making it impossible to eliminate debt quickly or effectively.
The right way: Your goal when consolidating should always be to get the interest rate as close as possible to zero. At most, the rate should be less than 10% to make consolidation an effective solution for you.
Most credit cards are unsecured debt. That means that there’s no collateral in place to protect the creditor in case you default. That’s different from secured debt, like a mortgage, which uses your home as collateral. In this case, if you default on your mortgage, the lender will take your home and sell it to recoup their losses.
Some people think home equity loans are a good way to consolidate credit card debt. However, this effectively converts unsecured debt into secured. Now, if you fall behind, you can be at risk of foreclosure.
That’s what happened to Carol after her balance transfer solution didn’t work. A creditor advised that she could take out a second mortgage to pay off her credit cards. Unfortunately, that just made her financial situation worse.
“My mortgage payments went up to $2,000,” Carol explains. “I could barely make the payments, but only if I started charging my day-to-day needs on credit cards again. And out of that $2,000, I was paying over $1,000 a month in interest on the mortgage.”
The right way: Keep unsecured debt unsecured. Borrowing against your home equity increases your risk of foreclosure. If you can’t make the payments on a credit card, it can lead to collections. But if you can’t make the payments on a home equity loan or HELOC, you risk losing your home!
In most cases, you should expect some kind of cost associated with consolidating your debt. Some fees are normal. However, excessive costs mean you have more to pay off. So, while you should expect some added costs, avoid high fees when possible.
For example, let’s say you want to use a credit card balance transfer to consolidate. Almost any balance transfer credit card you choose will have a fee that’s applied for each balance transferred. Some have a $3 fee per transfer, while others are 3% of the balance you move. That’s a big difference. If you transfer $25,000, then the 3% card will increase the cost of debt elimination by $750.
It’s important to note that fees for debt management programs are set based on your budget and rolled into the payments for the program. These fees are regulated by states and capped at $79 nationwide. The average client pays around $49.
The right way: Make sure you understand costs and fees before you consolidate. Compare options to find the lowest fees possible with the solution you want to use. For example, compare balance transfer fees on different cards before you apply.
Let’s be honest, most people would prefer to solve their own debt problems on their own. It’s not easy to let someone into your financial world, especially if things aren’t exactly going well. But using a do-it-yourself solution from a weak financial position is a recipe for disaster.
The right way: If you owe more than $30,000 or have a bad credit score, consolidating on your own can be tough. You may be better off asking for help.
When people first consolidate, they’re excited that they finally have a solution to pay off their debt. So, they’re willing to do whatever it takes to reach zero. However, as time passes, it’s easy to get tired of sticking to a budget and cutting back. As time passes, you slip back into bad spending habits and may start making new charges again.
With debt management program clients, we usually see this drop-off around the six-month mark. Keep in mind that enrollment in a debt management program is completely voluntary. However, if you drop out your creditors are likely to restore your original interest rates and can even reapply penalties.
The right way: First, choose a solution that gets you out of debt as quickly as possible. Anything longer than 60 payments (5 years) is generally too long to keep up with effectively. And always remember, while debt elimination can be tedious, it’s worth it in the end!
Don’t confuse commercials that offer to “settle your debt for pennies on the dollar” with credit card consolidation. Consolidating credit cards—even with a debt management program—is not the same thing as a debt settlement program.
Debt consolidation always pays back everything you borrowed, to help minimize credit damage. By contrast, each debt you settle creates a negative remark on your credit that remains for seven years from the date the account first became delinquent.
The right way: Only consider settlement once you’ve exhausted all other options. It should only be used for debts that are already in collections. And if you’re worried about damaging your credit, just don’t do it!
If you consolidate on your own, then you can seek any type of new financing that you need. If you consolidate through a debt management program, you can qualify for loans like a mortgage or auto loan; however, you can’t apply for new credit cards.
In any case, be very careful with any new financing you take out while you repay consolidated credit card debt. Consolidation often makes it easier to qualify, because it fixes your credit utilization ratio and helps build a positive credit history. Those are the two biggest factors used to calculate your credit score.
The right way: Even if you can qualify for a loan, it doesn’t mean that you should apply. Always consider your debt-to-income ratio carefully. If you’re close to your borrowing limit, a new loan could make it tough to keep up with your bills. Ideally, you want your debt-to-income ratio to be 36% or less to make it easy to maintain stability.
Once you complete a plan to repay your debt, you should also complete a thorough review of your credit report. Creditor should automatically inform the credit bureaus that your account is paid or current. However, mistakes and errors happen frequently, particularly following a period of financial hardship. That means it’s up to you to make sure your credit report is up to date and that old errors aren’t hanging around.
The right way: Go to annualcreditreport.com to download your credit reports from each credit bureau for free. Then check them for the following errors:
Make sure account information has been updated to reflect your zero balances.
If you go through a debt management program, make sure the credit history on each account shows that you made your payments on time.
Any paid collections accounts should show up as closed; if you negotiated with the collection agency to remove the account in return for payment, make sure it’s gone.
The last thing you want after all this work is to end up right back in the same situation. So, figure out how you ended up with so much debt, and then take steps to adjust your financial habits. That way, once you get out of debt, you can stay that way.
Never spend more than 10% of your income on credit card debt payments.
Of course, even the best-laid plans can get derailed, particularly after a few years. The good news is that if you end up in the same situation, you can consolidate again.
Consolidating credit card debt
“The current economy is affecting how easy it is for people to consolidate debt,” Consolidated Credit President Gary Herman explains. When the Fed increases the federal funds rate, banks and lenders increase their interest rates, too. That means it is getting harder and harder to get the loan interest rate you’d need on a debt consolidation loan.
“At the same time, rising prices are squeezing people’s budgets. That’s making it harder for people to make larger payments on their debts. That’s another factor that could affect your ability to consolidate your debt this year.”
High interest rates are bad if you want to consolidate
The Federal Reserve controls a key interest rate known as the Federal Funds Rate. That’s the rate that banks use to lend to each other. When that rate rises, all the rates banks charge on consumer loan products rise, too
There have already been several rate hikes this year. The Fed warns more are on the way. So, if you do plan on using a loan to consolidate, it’s best to do it sooner rather than later. Also make sure to check the interest rate. If you can’t get an interest rate lower than 10% APR on a debt consolidation loan, you may want to explore other options.
Creditors are offering better terms, if you can qualify
One advantage for people with good or excellent credit is that creditors have started to offer longer introductory periods on balance transfer credit cards.
During the pandemic, credit card companies began to limit 0% APR periods. The longest period you could find was 18 months, and those were reserved for people with the best credit.
Now, you can find cards that go up to 21 months and you may soon start to see up to 24 again. That means you’d have two years to pay off your debt interest-free.
“Paying off credit card debt interest-free is immensely beneficial in the right circumstances,” Herman explains. “Just make sure you balance your budget so you can avoid new credit card charges. You especially don’t want to make charges on the 0% APR card. If you do, the purchase would get paid at the interest rate for purchases first before the consolidated balance.”
Using consolidation to get ahead of budget challenges can be risky
If your budget is getting squeezed by inflation, you may be considering credit consolidation to lower your payments. It makes sense, lowering your debt payments frees up money to cover rising costs.
The challenge is making sure that the payments are low enough to balance your budget. If a debt consolidation loan will reduce your payments by $200 per month, but your budget is short $250, then you’re still not fixing the issue. You’ll end up relying on credit cards to cover that leftover shortfall.
Does the downturn affect consolidation with a debt management plan?
“The good news is that the rising interest rates that are making do-it-yourself debt consolidation less beneficial don’t affect a debt management program,” Herman says. “We work with creditors to reduce or eliminate interest applied to your account. That rate reduction isn’t tied to the economy. So, we can still help you get rates as low as 0% in some cases..”
This means that people who want to consolidate still have a way to do so even if they can’t qualify for the do-it-yourself options at the low rate they need.
“Credit card companies want to work with people,” Herman encourages. “Working with a credit counseling organization like Consolidated Credit shows them that you’re serious about paying back everything you charged on your credit cards. So, we can work with them to reduce or eliminate the interest charges applied to your balance and find a monthly payment that you can afford. It’s a great way to consolidate for those who can’t successfully consolidate on their own.”
Consolidated Credit offers proven results in credit consolidation
In nearly 30 years, Consolidated Credit has helped consumers consolidate over $9.75 billion in credit card debt. In 2021 alone, we helped nearly 10,000 Americans consolidate almost $114 million in credit card debt.
This map shows the average balance that consumers had in each state when they consolidated. You can also hover over each state to see how much debt we consolidated for clients in each state in 2021.
Keep in mind that we understand that credit consolidation is not the right solution for everyone. As we said in the introduction, this is not a financial silver bullet that will work in every situation.
As a nonprofit credit counseling organization, our certified credit counselors will only recommend a debt management program if it is the best debt solution to use in your situation. So, while we provided free credit counseling to over 172,000 people last year, only 9,859 went on to consolidate with us.
For others, some received recommendations to apply for credit consolidation loans or balance transfer cards. If a counselor sees that you should be able to consolidate successfully on your own, they can confirm that for you.
In other cases, the people who received credit counseling were simply not a good fit for consolidation in their current situation. Many were facing unemployment and lost income. While credit consolidation may lower someone’s monthly payments, those payments need to be made.
If you don’t have the income to consolidate, then you may need to wait for your situation to improve or consider other debt relief options, such as bankruptcy.
Talk to a certified credit counselor to find the best credit consolidation option for your needs.
All articles and educational content on Consolidated Credit are written by and carefully reviewed by certified credit counselors, HUD-certified housing counselors and financial coaches.
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