If you’re bogged down in credit card payments, it’s difficult to see light at the end of the tunnel. Every late bill and creditor notice can gouge your credit score and fill you with anxiety.
But you’re not alone – everyone experiences some financial trouble at some point in their lives. And when you’re ready to take charge of your finances and start managing your debt, credit card consolidation can help you climb out of the hole.
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What is credit card consolidation?
Credit card consolidation involves combining your credit card debts into a single monthly payment at one interest rate. By lumping your credit card loans, you can often score more favorable terms, which makes it easier to pay off your debt.
How does credit card consolidation work?
Debt consolidation is essentially a refinanced loan that comes with better terms. Many consolidation plans come with a lower interest rate upfront that rises after your introductory period expires. Typically, credit card consolidation plans come with:
- One interest rate
- Extended payment schedules
- Lower minimum payments
Note that debt consolidation isn’t the same as a settlement. In consolidation, you combine your debts into one loan. In a settlement, you can reduce the amount of debt you have to repay.
When should you not consolidate your credit card debt?
Debt consolidation isn’t for everyone – for some, it leads to a continuation of bad financial habits. You might be a poor candidate for consolidation if:
Your debt is astronomically high
If your total debt payments (including your rent) cost more than 50% of your gross monthly income, taking on a payment you can’t afford will only hurt your credit.
You’re prone to excessive spending
Debt consolidation loans aren’t advised for individuals who are prone to high spending and don’t plan to cut back. Otherwise, you’ll pay off one debt to find yourself staring at another one.
You have a poor credit score
Lenders use your credit score to help determine your interest rate. If you have a bad credit score, you may not qualify for a low enough interest rate to make consolidating your debts worth the price.
6 ways to consolidate credit card debt
You have several safe options to consider when consolidating credit card debt. We’ll cover several of them here.
Credit Builder Loans
Taking out a Credit Builder Loan from MoneyLion is one way to consolidate your debts and build your credit score at the same time! With a $19.99 per month Credit Builder Plus membership, you can boost your score as much as 60 points in 60 days with a safe, affordable, competitive-rate installment loan.
Plus, unlike some of the other options below, you don’t have to risk your property!
Debt management plans
If you have lots of debt, you might work with a nonprofit credit counseling agency to build a debt management plan. The premise is simple: you make monthly payments to the agency, and they negotiate better loan terms and pay your creditors for you.
The catch? You may have to close some accounts (which can hurt your credit score) or pay an additional service fee.
Balance transfer credit cards
Some credit cards come with a 0% APR introductory period, after which the interest rate rises. If you can pay off your debt before the introductory period expires, you can get out of debt without paying interest.
However, applying for a new card might lower your credit score, which may be undesirable if you already have poor credit.
Home equity loans
If you’re a homeowner, you can apply for a home equity loan or home equity line of credit (HELOC) using your house as collateral. This can net you a lower interest rate than other types of loans. But if you default on your loan, you risk losing your house – so weigh this option carefully!
Cash-out auto refinance
A cash-out refinance involves replacing your current auto loan with a new one and then borrowing an extra amount against the equity in your car. Although you’re taking on more debt, you might get a better interest rate, plus some extra cash to put toward your other debts.
However, if you default on the loan, you might lose your car. And if your car’s value depreciates, you risk owing more on the loan than your car is worth.
Another way to consolidate your credit card debt is by taking out a loan against your 401k retirement savings. These types of loans don’t usually affect your credit score – you don’t even have to undergo a credit check.
However, borrowers are limited to 50% of the total savings amount, which may not be enough to cover your debt. And if you default on your loan, you put your retirement savings at risk. As such, it’s wise to only consider a 401k loan as a last resort.
Factors to consider when consolidating your credit card debt
Before you consolidate your debt, you’ll want to ask yourself a few key questions:
Do you have a handle on your spending?
If you have a habit of spending more than you make, debt consolidation just throws fuel on the fire. But if you’re working toward better money management habits, opening a $1 per month RoarMoneySM account can help you get control of your finances with:
- Weekly spend reports to help you budget
- Cashback rewards on everyday spending
- Access to 0% APR InstacashSM advances to cover life’s emergencies
- Early direct deposits
- And more!
Will you pay fees to move your debt?
Balance transfer credit cards are one way to consolidate your debt, but they’re rarely free. Most cards charge 3-5% of the total amount you transfer. And creditors that allow balance transfers without a fee come with their own limitations.
How much can you save?
Debt consolidation loans and credit cards often come with lower interest rates. For instance, if you’re paying 25-30% right now, you might be able to get rates as low as 12-15% (or even 0% with a balance transfer card). But if you’re not being quoted lower interest rates than you’re currently paying, consolidating your debts may not be your best option.
Have you created a payment plan with your creditors?
Many creditors will work with you to create a payment plan and reduce your debt load if you’re in a tough spot. After all, they’d rather keep you as a customer at a low interest rate than lose you entirely! By contacting customer service, you may qualify for:
- Extended payment terms
- Lower monthly minimums
- And even a slightly lower interest rate
But note that creditors often limit these conditions to a short window of time or until your situation improves. As such, it’s better to reach out sooner, rather than later!
MoneyLion’s Safety Net can help you consolidate your credit
Consolidating your credit card debt can help you secure your financial future while paying a lower interest rate. Just be sure you can make your payments and keep your new debt low!
And if you find yourself in a bind more often than not, it might be time to set up a financial Safety Net with MoneyLion. You’ll get peace of mind that your future is secure with:
- Two day early direct deposit
- Up to $1,000 in 0% APR Instacash loans
- An automated investing account with fully managed thematic portfolios
- And more!
Sign up to get started on a better financial journey today!