Consolidate Credit Card Debt Without Ruining Your Score

By Lindsey Ryan

Are you bogged down with credit card payments? Finding it hard to pay your bills on time and getting notices from creditors?

It’s okay. Everyone goes through financial troubles at some point in their lives. But it doesn’t have to get so bad if you are willing to learn how to manage your debt smartly. 

Taking out a new loan to pay off multiple debts, known as credit card consolidation, is one way of managing rising debt.

What Is Credit Card Consolidation?

Credit card consolidation involves combining all your credit card debt into a single monthly payment schedule with the lowest interest rates possible. Multiple debts are combined into one with more favorable terms. These terms can include a lower interest rate and a more extended payment schedule with lower monthly premiums.

Should You Consolidate Your Credit Card Debt?

If you have acquired several lines of credit and loans, debt consolidation companies might be prompting you to consider a consolidation plan. But before you consolidate credit card debt, you must know how it affects your credit score.

Debt consolidation is essentially a refinanced loan with lower interest rates, a longer repayment period, and lower premiums. The interest rate stays constant for an introductory period and can go up after that. 

Debt consolidation is not the same as debt settlement. You are only restructuring your debt and not reducing it.

There are different options to consolidate credit card debt. You can also opt for a debt management plan, which involves a credit consulting agency that manages your debt plan for you in exchange for a monthly service fee. 

If your total debt exceeds 40% of your income, debt consolidation is a risky option, and you should avoid it. Debt consolidation loans are also not advised for those who are prone to high spending or those with excessive debt.

On the contrary, if your debt amount is small and you can pay it off within six months you might want to consider consolidating your credit card debt.

When Should You Opt For Credit Card Consolidation? 

Suppose you have three credit cards with interest rates ranging from 17 to 26%. You have a relatively good credit score, and you make all your payments on time and you generally want to reduce the number of individual payments you make each month.

In that case, you can choose to consolidate all your debt on a single credit card that offers a lower interest rate or a zero-interest introductory rate. Be sure to research the card you are consolidating your debts to as you should plan to keep and use it as your primary credit card for years to come. Otherwise, you risk falling into a cycle of opening and closing accounts every few years which will damage your credit history. 

Ways to Consolidate Credit Card Debt

There are options to consider when consolidating your credit card debt. Below are 4 ways to safely consolidate your credit card debt. 

Balance Transfer Credit Card

You can transfer your existing card balances to a new card with a 0% APR for an introductory period. With this option, you can pay off your debt interest-free. Although after the initial period ends, the interest rate will go up. You will need to pay a transfer fee, which will be around 3% to 5% of the total amount you transfer. 

To avail the benefits of this option, you must pay the debt as quickly as possible before the regular interest rate sets in. Your credit score might also get affected when you apply for a new credit line.

Debt Management Plans

You can work with a nonprofit credit counseling agency that will set up a debt management plan for you. You make monthly payments to them, and they will pay the creditors for you. They may negotiate better payment terms for such as lower interest rates and longer payment schedules.

In return, they might charge you a service fee. Ask for all the terms beforehand from your agency. They might ask you to close certain accounts, which can damage your credit score.

Home Equity Loans

If you are a homeowner you can apply for a loan based on your house equity by applying for a home equity line of credit. These loans come at much lower interest rates because they have an asset to back it up. The biggest drawback to this is that if you default on your loan, you will lose your home. If you are financially stable, this could be an option but it is important to weigh the risk that comes with putting your home as collateral. 

401K Loans

You can also take out a loan against your 401K retirement savings, as long as the amount does not exceed 50% of your total savings. 

This kind of loan typically does not affect your credit score, and you will not need to provide a credit check. However, the biggest drawback of this is that you risk losing your retirement savings if you default on the loan. Because of this, we suggest that you only consider this as a very last resort.

Things To Consider When Consolidating Your Credit Card Debt

There are a few things you should keep in mind before opting for debt consolidation, such as:

Will You Pay Fees To Move Your Debt From One Account To Another?

Balance transfer comes at a cost. You will have to pay anywhere from 3% to 5% of the total amount you transfer. Some creditors allow balance transfers without a transfer fee, but they are limited in number. Also, they come with their own limitations.

How Much Can You Save With Debt Consolidation?

With debt consolidation loans, you will be paying much lower rates. If you typically pay 25-30% interest, you can switch it down to 12-15%. Debt consolidation should ideally reduce your interest rates by 10-12%. Paying off all your credit cards can give your credit score a boost as well. If you are not seeing a 10-12% reduction in overall interest rate, consolidating debt might not be the best option. 

Have You Reached Out To Your Creditors To Create A Payment Plan?

If you’re in a financial bind, you can contact your creditors and tell them about your situation. Most creditors will be willing to work with you, as they would rather keep you as a customer paying low-interest rates instead of defaulting on your loan completely. 

Creditors may extend your payment duration or reduce your premium for some time till your situation stabilizes.

Will Closing An Account Hurt Your Credit Age?

Closing an account can temporarily lower your credit score. When you close an account, the available credit limit reduces, and your credit utilization rate increases. But this is only temporary, and your credit score rebounds if you keep making payments on time.

Is Credit Consolidation For You? 

Consolidating your credit card debt can be an excellent way to clear up your debt without having to pay exorbitant interest rates. However, you must be sure you can clear the debt within the timeframe. Otherwise, you risk affecting your credit score and accruing even more debt. 

After careful consideration of whether you choose credit card consolidation or have created a plan to pay off your debt, you might want to start rebuilding your score with a Credit Builder Loan from MoneyLion. It’s part of the Credit Builder Plus membership, and many Credit Builder Plus members have seen an increase in their credit score by up to 60 points in just a couple of months.

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