The average American family has more than $7,000 in credit card debt, according to recent surveys. And as a nation, we hold roughly $1 million in credit card debt.
This type of debt can be especially discouraging. The interest rates are notoriously high, meaning we end up paying back far more than we spent.
Credit card debt can also often be a reminder of decisions that we aren’t particularly proud of, such as poor financial decisions in our younger years.
While there’s no easy way to get out of credit card debt, a debt consolidation loan provides a way to pay your debt off a bit more quickly and save money in the process.
Using Debt Consolidations to Pay Off Credit Card Debt
What is debt consolidation?
Debt consolidation is the process of taking out one loan to cover the balance of other debts. A debt consolidation loan is typically an unsecured personal loan — in other words, there’s no collateral attached to it. In the case of debt consolidation to pay off credit card debt, you’re using a loan to pay off credit cards.
What is the purpose of debt consolidation?
Debt consolidation is often used for the purpose of credit card debt.
Credit cards have notoriously high interest rates, especially for younger borrowers. If you have a lot of debt, you might be making sizable monthly payments on multiple cards, all at painfully high interest rates.
When you consolidate those credit cards into a single debt consolidation loan, you have one monthly payment and one (hopefully) lower interest rate.
How does debt consolidation affect your credit?
Anytime you borrow money, you can expect to see an impact on your credit score. In the case of a credit card debt consolidation loan, you’ll likely see both a positive and negative impact.
First, you’ll probably see your credit score take a bit of a hit because of the hard inquiry on your credit report and the new debt account.
But in the long run, it might actually help your credit score. When you consolidate your credit card debt into a single personal loan, you bring your credit card balances down to (hopefully) zero. As a result, your credit utilization goes way down.
Additionally, as you make on-time payments on your loan, your positive payment history will help to slowly boost your credit score.
Pros and cons of debt consolidation
Debt consolidation comes with its fair share of pros and cons that you should be aware of before taking the leap.
- You’ll save money. Ideally, a credit card consolidation loan would have a lower interest rate than your credit cards. As a result, more of your money each month is going toward interest. You’ll save a lot of money in the long-run.
- You’ll have fewer monthly payments. If you have multiple credit cards with debt, you likely have multiple monthly payments. A debt consolidation loan can help get you down to just one monthly payment.
- You’ll boost your credit score. As I mentioned above, a debt consolidation loan can help to boost your credit score over the long run.
- You may still end up with a high interest rate. Because personal loans are unsecured, they still come with higher interest rates than other loans. And for someone with a low credit score, your rate might be just as high — if not higher — than the rate on a credit card.
- You could pay fees. Many lenders charge origination fees on personal loans, meaning you’ll end up paying a bit more money.
- It’s not the most cost-effective option. Depending on your credit score and the amount of debt you have, there might be a better way to pay off your credit card debt, which I’ll talk about in the next section.
Debt consolidation alternatives
A debt consolidation loan can be an effective way to pay off credit card debt faster, but it’s not my favorite option. Depending on your credit score and the amount of debt you have, you might instead consider a balance transfer.
A balance transfer is when you open a new credit card and transfer your existing credit card balance to the new card. Many credit card companies offer 0% interest from anywhere from 6 to 18 months for a balance transfer.
With the 0% interest, you have the chance to pay down your credit card debt much more quickly, with none of your money going toward interest.
To learn more, visit my guide on paying off credit card debt with a balance transfer.
When is debt consolidation a good idea?
Depending on your situation, a debt consolidation loan might be the right option to help you pay off your credit card debt. Here are a few situations where it’s probably a good idea:
- You have too much debt for a balance transfer
- Your credit score doesn’t make you eligible for a good balance transfer offer
- You know you wouldn’t be able to pay off your debt during the 0% interest promotional period on a balance transfer card
As with any financial decision, it’s important to consider your unique circumstances when deciding if a debt consolidation loan is for you. For some people, it’s the perfect solution. But other people might be better served with an alternative.