Want to save money on interest while paying off your credit card debt? Consider a credit card consolidation loan.
There are a few ways you can do this including a balance transfer, a debt consolidation loan, a personal loan or a peer-to-peer loan. You can learn more about your options in the guide below and decide which one is right for you.
What’s in this guide?
You could borrow up to $40,000 for a variety of purposes, with rates starting from 6.95%.
- Recommended Credit Score: 640 or higher
- Minimum Loan Amount: $2,000
- Maximum Loan Amount: 40000
- Loan Term: 3 or 5 years
- Turnaround Time: 1-3 business days
- Simple online application process
- No prepayment penalties
How does credit card consolidation work?
A credit card consolidation loan combines your outstanding balances on your credit cards into one monthly payment. The benefit is that you’ll pay off your existing debts with those credit card companies and have a simplified payment process with just one lender. You could possibly save on interest payments too, since credit cards tend to come with higher interest rates than personal loans do.
Credit card consolidation could improve or hurt your credit depending on how you use it. Falling behind and making late payments on your credit cards may have damaged your credit, but consolidating them to one monthly payment could raise your credit score as your payment history improves. On the other hand, taking on a new loan, in general, could cause a short-term drop in your credit score because of the hard inquiry.
Compare personal loans for credit card consolidation
A selection of personal loans you can apply for
Use this table to compare the interest rates, loan amounts and eligibility requirements of top online lenders.
A selection of brokers you can speak to
One way to make sure you’re getting the best rate is to let a broker find a competitive rate for you.
Credit card consolidation case study
In other words, here’s what Matt’s credit card debt is like without consolidation if he only makes minimum monthly repayments:
|Credit card one||Credit card two||Both cards|
|Balance and rate||$4,500 at 19.99% APR||$3,200 at 13.24% APR||$7,700|
|Minimum monthly repayment||$90||$64||$154|
|Time it takes to pay off||43 years and one month||16 years and 8 months|
Here’s how much Matt saves if he takes out a $7,700 consolidation loan at 13.39% APR:
|Total repayment||Time it takes to pay off||Total savings|
What are your options for credit card consolidation?
- Credit card balance transfer. Card providers usually offer 0% APR for a limited period of time, allowing you to pay off your debt. Keep in mind the card isn’t necessarily free when you factor in purchase APR and annual fees to consider.
- Debt consolidation personal loan. You can take out a larger personal loan and pay off your credit card balances using the funds. Some lenders also give you the option of paying your creditors directly rather than you having to divvy up the funds yourself.
- Peer-to-peer loans. Also referred to as P2P loans, these are becoming a popular choice for people looking to pay off their credit cards. Apply for a loan online and it will be funded by one or more “peer” investors.
- Debt consolidation companies. These companies work by negotiating with your credit card providers to reduce your interest rate or lower your monthly repayments. You make a single payment and the debt consolidation company will distribute the payment across your card accounts.
How can I decide which is the best consolidation method for me?
- What’s your credit score? Whether or not you have good credit will affect the interest rate you’re offered by lenders as well as your chances of being approved. Make sure the rate you’re given will save you money when you consolidate your credit card debt.
- How much debt do you have? The amount of debt you have may affect the credit you can apply for. Check the allowable limits on different accounts before you apply to ensure you can consolidate all of your debt. Other lenders may not be willing to take on your debt if it’s too large, so take this into consideration as well.
- Do you want fixed repayments or would you prefer flexibility? Different consolidation methods offer different ways to repay. For example, if you opt for a P2P loan your payments will be fixed, whereas you can make variable payments and pay off more than you owe with a credit card.
Compare balance transfer credit cards to consolidate debts
How to choose the best debt consolidation loan
Take the following into consideration when you’re looking for a debt consolidation loan that fits your needs:
- Loan amounts. Lenders have different range of approved loan amounts, generally the most reputable ones facilitate loans of up to $30k.
- Interest rates. Keep an eye out for lenders with competitive rates.
- Fees. Compare competing fees associated with the loan to determine if you’re getting a reasonable deal.
- Service area. Is this lender available in your state?
- Credibility. Read reviews of brands you are considering on finder.com to make sure the lender is legit.
- Honesty. Credible lenders will be up front with estimates and potential terms that you may qualify for.
How to avoid scams
- Research. Make sure the lender is accredited and licensed to do business in your state. License numbers should be visible in the footer of the website and in the Terms and Conditions.
- Pay close attention to guarantees. Lenders can’t guarantee that you will qualify for a loan without knowing your particular situation and personal information.
- No upfront fees. Be wary of having to pay any fees to apply for a debt consolidation loan, you should never have to with a legitimate lender.
- Take note of initial contact. You should always be the one to initiate contact, unreliable lenders are more likely to be insistent in their search for borrowers.
- Beware of companies claiming to offer loan debt consolidation. Many of the companies that advertise this way instead offer debt management and settlement services.
Balance transfer credit card vs. debt consolidation loan
A debt consolidation loan and a balance transfer credit card are similar in purpose, but there are some key differences. The most obvious is that a loan generally has equal monthly payments while a balance transfer credit card has variable payments based on a percent of the balance owed.
Balance transfer credit cards are used to transfer one or more high-interest amounts from a different provider. Typically these credit cards have introductory periods that generally last for 6 to 12 months and offer low or 0% APR. A balance transfer credit card’s usefulness is on a relatively tight timeline. After the promo period is up the APR reverts to the standard purchase rate, which can be 20% or more.
Debt consolidation loans are also used to shift debt away from high-APR credit cards. Rather than taking advantage of a short-term promotional period, these are likely to have a lower APR than the non-promotional rate of a balance transfer credit card. A loan may be better when you want to pay your debt off over a longer period of time.
When should you not consolidate your credit card debt?
There are a few instances when credit card consolidation may not be the right choice to pay down your debt. You may want to reconsider if:
- The new APR is higher than your current APR. This is a red flag and would have you paying more debt.
- If it will hurt your credit score. Taking on more debt will generally damage your credit, though this should only last a short time. Enlisting the help of a debt consolidation company may make your credit score suffer, so only consider this option if you already have bad credit or have considered other options.
- You haven’t checked the reputability of the debt consolidation company. Disreputable companies operate in the debt space, so be sure to ensure you work with a company who works with your best interest.
Pros and cons of credit card debt consolidation
- Fewer accounts to worry about. By rolling several different balances into one you should be able to manage your repayments easier.
- Doesn’t hurt your credit score. By consolidating your debts, you’re still only making payments on what you owe. You’re not increasing your limit.
- Relief from high APRs. Two credit cards at 20% APR or more can potentially be rolled into a smaller APR loan.
- Getting into debt to pay for debt. New debt to manage old debt can be risky if you’re not prepared with a plan to pay it back.
- Secured loans may mean more risk. If you suffer a financial setback, you have your collateral to lose.
- Longer term debt. If you’ve consolidated your old credit card debt it’s usually rolled into a longer term loan. Your monthly repayments could be lower, but the interest paid over time could be higher.
5 tips to beat the credit card debt trap
Debt tends to stick around once you’ve picked it up. Use these tips to avoid getting into debt in the first place.
- Only spend what you have. Spending more money than you know you can pay back in the near future can make your credit card balance balloon. Make sure to reduce your spending during the next billing cycle to pay off any months that you drop more cash than you have. Can’t resist the temptation? You might be better off sticking with a debit card.
- Avoid interest. Pay off your credit card balance in full each month. The longer you take to pay off your balance, the more difficult — and expensive — it becomes thanks to mounting interest.
- Don’t spend everything you earn. Spending your last dollar can leave you vulnerable to piling on debt. Make and stick to a monthly budget to help manage your money.
- Save up. Unexpected expenses could come along and hurl you into a pile of debt. Be prepared by cutting out room in your budget to make a deposit into a high-interest savings account each month.
- Pay your bills on time. Protect your credit score by never being late on payments. You may need to get another credit card — or take out a loan — in the future, you can get lower, less risky interest rates.
Once you’ve decided to consolidate your debt you’ll need to choose the best way to do so based on your financial situation. Your plan to financial freedom can be supported by consolidation tools, but they need to be used well. Take your time and compare providers once you’ve narrowed down what you want to use. Doing so will help you get the most out of your consolidation and get you on your way to fully overcoming your debt.