Should you consider credit card debt consolidation?

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Credit Cards

Consolidating your credit card debt can be a good option to help you eliminate your debt more quickly in certain scenarios. But it’s important to understand the methods of how to consolidate your credit card debt, as well as when credit card debt consolidation makes sense and when it doesn’t.

When credit card debt consolidation makes sense

To determine if debt consolidation is the right approach for you, you’ll need to add up your debt balances to see if you’d be able to get a lower rate or earlier payoff date by consolidating. If not, you may want to think about other options like a debt management plan or do-it-yourself payoff method—such debt snowball or debt avalanche.

If your situation fits the bill for credit card debt consolidation, there are a few things you’ll want to do before you get started:

  • Evaluate your spending and figure out why you’re in debt. Your total debt, except for your mortgage if you have one, should be 40% or less of your gross income. Make sure you’re not spending more than you’re earning, and if you are, see if you can reduce your spending or increase your income. Otherwise, debt consolidation probably isn’t a good fit for you.
  • Create a budget, and stick to it to prevent an ongoing cycle of debt.
  • Make sure your credit score is good enough to qualify for a balance transfer card that comes with a 0% introductory APR or a low-interest debt consolidation loan.
  • Ensure you have the cash flow to make consistent payments toward your debt consolidation method of choice.

When credit card debt consolidation doesn’t make sense

Credit card debt consolidation isn’t a one-size-fits-all solution. This approach doesn’t make sense if:

  • You have a history of overspending, and that habit is how you got into debt in the first place.
  • You’re swimming in so much debt you won’t be able to repay it even with smaller monthly payments.
  • You can pay off your existing debt within a year and wouldn’t save much by consolidating.
  • Your total debt eclipses half your income, and a simplified payment wouldn’t help you even with a lower interest rate.

How to consolidate credit card debt

There are a few different ways to tackle credit card debt consolidation depending on your personal situation.

Balance transfer credit card

Most balance transfer credit cards, which allow you to move a credit card balance to a new card, come with a 0% introductory APR offer that can range from 12 to 21 months. While you may be able to avoid paying interest for some duration, many balance transfer cards come with a balance transfer fee that range from about 3% to 5% on each transfer. Ideally, you’ll want to pay off your debt before the introductory offer ends to make the balance transfer fee worthwhile.

Keep in mind that when you apply for a new line of credit, you’ll likely be hit with a hard inquiry, which can temporarily dip your credit score. Balance transfer cards also typically require a good to excellent credit score to begin with.

Debt consolidation loan

If your credit score isn’t quite up to snuff or your debt exceeds $10,000, you may want to consider a debt consolidation loan. Within debt consolidation loans, you have several options:

  • Personal loan: allows you to prequalify without affecting your credit score, but may have a higher APR than your existing credit cards
  • Home equity loan: if you’re a homeowner with enough equity in your property, this option typically has lower interest rates and longer repayment periods than personal loans, but you’re also putting your home up as collateral
  • 401(k) loan: You can dip into your retirement account to get a lower interest rate than you’d get elsewhere, but you could get hit with harsh fees or penalties if you’re unable to repay the loan and have a limited amount of time to repay the loan if your employment situation suddenly changes