Credit card debt consolidation allows you to roll several credit card balances into one monthly payment, leaving you with one due date to keep track of and one debt to pay off. Debt consolidation can also come with a lower interest rate, which could mean substantial savings and the ability to help pay off debt more quickly.
How does credit card debt consolidation work?
Consolidating credit card debt is a fairly straightforward process. First, you identify all the debts you’re hoping to consolidate. Once you understand your total debt, find the right loan or credit card for your circumstances. If you apply and are approved, you may be able to consolidate your debt into one balance.
Credit card debt consolidation methods
While there are other methods of consolidating credit card debt, the two main ways are Balance Transfer credit cards and personal loans.
Balance Transfer credit cards
A Balance Transfer card lets you transfer balances from your current cards to a new card.
Why transfer the debt from several cards to one card? A single monthly payment can be more convenient and easier to budget for. Some new cards have a low introductory APR on Balance Transfers for a specified period. You can use the introductory period to pay off credit cards while accumulating little to no interest. When the introductory rate expires, any balance left over will start to incur interest at the regular rate.
When considering a Balance Transfer card, be aware that the issuer may charge a Balance Transfer fee. These are often a percentage of the total balance you transfer or a flat fee, whichever is higher, but the amount will depend on your cardholder agreement. Also, Balance Transfer cards come with a limit. If your limit is lower than the total of the balances you want to transfer, you won’t be able to consolidate everything.
Personal loans
You can use a personal loan – sometimes called a debt consolidation loan – to consolidate credit card debt. If approved, you’ll receive a lump sum that you can use to pay off your credit cards, or the lender will pay the balances directly. Then, you’ll be responsible for making a single monthly payment to the new lender. Depending on the rate you qualify for, a personal loan can also help you save money on interest.
Personal loans usually come with a fixed interest rate, so you’ll know what your monthly payments will look like. When applying for a personal loan, be sure to find out exactly what your payment will be and decide whether you can confidently make the payment each month by the payment due date. Also keep in mind that personal loans can come with origination fees.
When should you consider consolidating credit card debt?
Debt consolidation can be a good idea if you qualify for a personal loan or Balance Transfer card that will ultimately save you money in interest. If you’re not sure, calculate how much you’re paying in interest on your current credit cards and compare it to what you would pay monthly and overall if you consolidate.
Alternatives to credit card debt consolidation
There are ways to strategically pay off debt without a debt consolidation loan or a Balance Transfer, including the debt snowball and debt avalanche methods.
Debt snowball
The debt snowball method involves ranking your debts from smallest and largest. You focus on eliminating the smallest debt first while making minimum payments on all the others. Once you pay off the smallest debt, you roll that amount into payments for your next-smallest, and so on. As you progress, you’ll gradually tackle larger and larger debts until you’ve paid everything off.
The debt snowball method can be motivating because you’re prioritizing paying off debts in full, checking them off a list as you go and reaching smaller goals on your way to becoming debt-free.
Debt avalanche
For the debt avalanche method, you start by ranking your debts from highest to lowest interest rate. You keep making the minimum payments on all your debts and use any additional funds to pay off the debt with the highest interest rate faster.
Once you’ve paid the highest-interest debt, you use the money that was going toward that debt to pay the debt with the next-highest interest rate, and so on.
The debt avalanche approach is efficient because it can help save you money on interest in the long run. By lowering the amount you pay in interest over time, it can allow you to put more toward the principals and chip away at your debt faster.
Keep building your credit
A Balance Transfer card or personal loan can offer a way to help you out of debt. Both options allow you to make one convenient monthly payment and potentially save money on interest. Finding a sustainable way out of debt along with practicing responsible credit card habits can allow you to keep building your credit.
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
