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Key takeaways

  • Debt consolidation can simplify your monthly payments and lower your interest rates, making it easier to manage credit card debt.
  • Balance transfer cards and personal loans are effective methods for consolidating credit card balances without negatively impacting your score.
  • Consulting a financial advisor can help you choose the best debt consolidation option for your specific financial situation.

Consolidate debt without hurting your credit today and take control of your financial future. American credit card debt is skyrocketing. According to TransUnion, the average balance per consumer rose to $6,295 in January 2024. The higher your balances, the harder it is to pay them off and the more overwhelming they become.

Luckily, there are ways to deal with credit card debt. Debt consolidation is one such strategy that, when done right, can help you get out of debt for less. It will not eliminate what you owe, but it can help you pay it off more efficiently.

Let’s go over debt consolidation, including credit card refinancing, and how you can use it to ease your debt burden and improve your score.

How does credit card consolidation work?

Credit card refinancing simplifies the repayment process by combining multiple card balances into a single payment, usually at a lower interest rate. It reduces the number of payments you need to keep track of, so you are less likely to miss a payment. When done right, it will lower your interest rates, saving you money and enabling you to pay off your debts faster.

Debt consolidation programs

Let’s go over how you can combine multiple balances into one monthly payments. There are two main types of debt consolidation programs: balance transfer cards and personal loans.

0% APR balance transfer offers on credit cards

Balance transfer cards let you refinance credit card debt by combining multiple credit cards into one card with a low to 0% introductory APR (annual percentage rate). This significantly reduces the amount of interest you pay, making it easier to pay down your principal balance quickly.

A few things to keep in mind with this method:

  • You must pay off the transferred balance before the introductory period ends (usually 15 to 21 months), or else you will be charged higher interest rates.
  • The promotional low interest rate usually only applies to the transferred balance. Additional purchases will be subject to a higher APR.
  • There is usually a balance transfer fee of 3% to 5% of the amount transferred.
  • You must have a credit score of 690 or higher to qualify.

Read more about credit cards!

Debt consolidation personal loans

Another effective approach is using a loan to pay off credit card debt. Apply for a loan with a lower interest rate, then use the lump sum to pay off your credit card balances. You are left with a single monthly payment at a fixed APR. If done right, this will simplify your finances and save you money on interest.

A few things to keep in mind are:

  • The loan may come with an origination fee.
  • To get a low APR, you will need good to excellent credit.
  • Repayment terms can be up to seven years.
  • Make sure that the total interest paid over the life of the loan is lower, not just the monthly payments.

One key aspect of how to transfer credit card debt to a personal loan is to compare interest rates and fees from different lenders. Credit unions do offer debt consolidation loans typically with lower interest rates and more flexible repayment terms than big banks.

When it makes sense to consolidate your debt

Finance consolidation can be a smart move under the right circumstances. If you have multiple high-interest card balances, being able to combine these into a lower interest rate loan or card can simplify your payments and save you money.

If you find it challenging to keep track of multiple due dates and minimum payments, consolidating bills into one monthly payment can help. A single monthly payment reduces the risk of missed or late payments, which can harm your score and cost money.

For consolidation to work, you need to have a good to excellent score. If your FICO score is under 670, it will be hard to get approved for a balance transfer card or personal loan with a low-interest rate.

Many people turn to debt consolidation for collections to reduce the stress of managing several past-due bills. It can be a way to pay off old accounts.

Does credit card debt consolidation hurt your credit?

One of the most common debt consolidation questions is whether it will negatively impact your credit score. When done correctly, consolidation should help your score more than hurt it. According to consumer reports, debt consolidation can positively impact your score by reducing your utilization ratio and making it easier to manage payments. Making timely payments is the best thing you can do for your score.

Additionally, you’ve only had cards before and now take out a personal loan, that will add to your credit mix. Lenders like it when you have both revolving (credit cards) and installment (loans) accounts because it shows how you handle different types of borrowing responsibly.

All those things will help your score, but initially, consolidation will hurt it. Any time you apply for a new account, the lender will conduct a hard inquiry, which can temporarily lower your score by a few points. This will happen when you first apply for the balance transfer card or loan. But it’s only temporary. Pay your bills on time and your score will go up.

Find out more about your credit score on MoneyFor.

How to decide which form of debt consolidation is best for you

The best method for you depends on your budget, score, and what terms you qualify for.

credit card refinancing

Both balance transfer cards and personal loans with low APRs require good to excellent ratings. If your score is in the poor or fair range, you will not be able to qualify for a balance transfer card. You may be able to find a loan with a low APR, if you’re lucky. Take a look at online lenders and credit unions that have more lenient requirements. Or see if you can borrow from friends or family.

The next step is to review your budget. If you opt for a balance transfer card, you must pay the balance off in full before the promotional period ends. If you cannot do that, do not apply for the card.

A personal loan will likely have a much longer repayment period. Make sure that you can afford the new monthly payments and that you are saving money on interest. If you need a structured plan, a loan can be particularly useful.

3 Alternatives to debt consolidation loans

If you can’t get approved for a debt consolidation loan or balance transfer card, there are still several viable alternatives to help you manage and reduce what you owe.

Bankruptcy: Consequences of forgiven debt

Bankruptcy is a last resort due to its severe and long-lasting impact on your score. There are two main types of personal bankruptcy: Chapter 7 and Chapter 13. Chapter 7 involves liquidating your assets to pay as dues as possible, while Chapter 13 allows you to keep your assets and repay your debts over a three to five-year period under a court-approved plan.

Bankruptcy can provide a fresh start, but it remains on your credit report for up to 10 years and can make it difficult to obtain loans or cards in the future.

Debt Management Plan: For long-term credit health

A debt management plan (DMP) is a structured program offered by credit counseling agencies. Through a DMP, the credit counselor negotiates with your creditors to lower interest rates and waive fees, making your monthly payments more manageable. You then make a single monthly payment to the agency, which distributes the funds to your creditors.

A DMP can simplify your payments and help you pay off your dues faster, usually in 3 to 5 years. A DMP can be a good alternative if you’re struggling with high-interest rates but can’t get approved for a loan.

DMPs do come with fees – usually a monthly fee and a start-up fee. You must be able to afford monthly payments for the plan to work.

Go to the National Foundation for Credit Counseling to find an accredited agency near you.

Think a debt management plan is for you?

Click here to read more and consider your options.

Debt Settlement: How it affects your credit

Debt settlement is when you or a debt settlement company negotiates with your creditors to pay a lump sum that is less than the total amount you owe. This option can significantly reduce your debt, but it comes with risks. Settling for less than the full amount can negatively impact your score, and creditors may not always agree to negotiate. Additionally, you will have to pay taxes on the forgiven amount if it’s over $600 plus the company fee, which can be steep.

Despite these drawbacks, debt settlement can be a viable option if you’re unable to manage your payments and need a more drastic solution.

How much do you need to file for bankruptcy?

Find out when bankruptcy is worth it.

Beware of high-interest consolidation loans and scams

As with anything, people are looking to make a profit off you.

Some lenders offer consolidation loans with interest rates higher than most credit cards. Others will offer loans with low monthly payments but a long repayment term. Check the total interest you’d pay, as it may end up being higher.

As with any loan, try to prequalify and compare interest rates and terms from multiple lenders to ensure you’re getting the best deal.

Deals that are too good to be true most likely are. Predatory companies may promise quick fixes or guaranteed approval, but they often charge exorbitant fees or engage in fraudulent practices. Be wary of any company that requires upfront payments, lacks transparency, or pressures you into making quick decisions.

To protect yourself, research potential lenders thoroughly, read reviews, and check their accreditation with organizations like the Better Business Bureau.

Frequently asked questions

Consolidation itself does not appear as a separate entry on your credit report. However, actions taken during consolidation, such as applying for a new loan or balance transfer card, result in hard inquiries that stay on your report for up to two years. The consolidated accounts and their payment history will remain on your report for up to seven years.

No, you do not have to close your accounts if you consolidate your debt. You should stop using your cards, but try to keep them open. Keeping the cards open can positively impact your utilization ratio and the length of time you’ve had accounts, both factors in your score. If you go with a debt management plan, the agency may require you to close your cards.

Bottom line

Debt consolidation does not get rid of what you owe, but it helps you get out of debt more efficiently and hopefully for less. If done correctly, you’ll pay a lower interest rate, simplify your monthly payments, have a date when you’ll be debt-free save money, and increase your score while you’re at it. Credit card refinancing can be the ticket to ending high-interest debt without damaging your rating.

Once you’re out of debt, be sure to stay out. Create a budget that works for you. Learn good financial habits, and keep your score up.

If you’re unsure how to manage your finances or which repayment method is right for you, talk to a credit counselor. They can help you establish a budget, learn good financial management, and become debt-free.

About the author

Rachel Alulis

Rachel Alulis has been the lead editor for Moneyfor’s credit cards team since 2015 and for the financial rewards team since 2023. Before joining Moneyfor, Rachel worked at USA Today and the Des Moines Register. She then established a successful freelance writing and editing business specializing in personal finance. Rachel holds a bachelor’s degree in journalism and an MBA.