When to Consolidate Credit Card Debt

In the early days of the internet, getting an email was an event. The friendly little voice informed you that, “You’ve got mail!” and we hurried to click the icon and explore our digital deliveries. These days, the novelty of electronic mail has long since worn off, and checking your email tends to be about as exciting as opening the mailbox to a stack of bills — mostly because those bills have wormed their way into our email inboxes.

Indeed, depending on your situation, that digital stack of bills can be just as overwhelming as their paper-printed ancestors. And when you have a series of debts that bring in a few too many bills — or just a single, larger bill with a few too many digits — your inbox can be a daily reminder that something needs to be done.

One of the most common sources of debt for many Americans is credit card debt, which can easily reach overwhelming levels if you’re stuck paying high interest rates and fees. Credit card consolidation (the process of using a single large loan to pay off several smaller debts) is a popular method of dealing with credit card debt that has become hard to manage. But when is consolidation the right choice?

To Obtain a Lower Interest Rate

The biggest driver behind many decisions to consolidate credit card debt is the desire to decrease the amount of interest being charged for that debt. With the average credit card charging an interest rate around 16% (and many subprime cards closer to 25-30%), credit card interest charges can make it much more difficult to pay off your balances.

Depending on the size of your credit card debt and the state of your credit, you may want to consider a credit card balance transfer (or several) before you start the consolidation process. With good to excellent credit, you may qualify for introductory balance transfer offers that provide zero interest on transferred balances for 12 months or more — and a 0% APR is much lower than the rate a personal loan will likely provide.

Keep in mind that most credit cards charge a balance transfer fee for the service, which will typically range from 3% to 5% of the total transferred balance. Check your card’s user agreement to find out if you will be charged such a fee before making a balance transfer.

If you don’t qualify for a good balance transfer offer — or you need longer to repay your debt than a balance transfer can provide — then a consolidation loan is often the best alternative to obtain a lower rate. Because of the way personal installment loans are structured, consolidating your credit card debt with a personal loan can often result in a much lower interest rate than most credit cards, and those with great credit may find rates in the single-digits.

You’re not necessarily out of luck if your credit is less-than-stellar, either. A little comparison shopping can sometimes uncover personal loans with lower APRs than your average subprime credit card, giving you a break on your bottom line. Plus, consolidation loans can be paid off over several years (often up to 72 months), making them ideal for consumers who need a longer period of time to repay their debt.

One thing to note is that while you can lower your monthly payment by extending the length of your loan, be cautious of extending your loan to the maximum length simply to get the lowest-possible monthly payment. The longer you take to repay your loan, the more interest you’ll end up paying over the life of that loan, increasing the total cost of consolidating.

To Simplify Your Debts

Although not generally the primary reason for consolidating credit card debt, a helpful consequence of consolidation is that you can vastly simplify your debts. When you use a single, larger loan to pay off a series of small credit card debts, you will go from trying to manage multiple bills and payments to a single debt repayment.

So, not only does consolidating your debts cut down on the clutter in your inbox, but it can also help you stay on top of your payments. According to FICO, payment history is worth 35% of your FICO credit score, so late or missed payments can cause serious credit damage. By consolidating your debts into a single loan, you’ll only need to remember to pay one bill on time each month, reducing the chance you miss an important due date.

Plus, when you simplify your debts, you simplify all of your personal finances across the board. For example, this means no need to arrange your debts according to some weather-themed prioritization scheme — should you really snowball your debts, or is it better to use the avalanche method, instead? — to make sure you’re paying them off in the correct order. Which, incidentally, also makes it easier to make (and maintain) a proper budget each month.

When Not to Consolidate

For many consumers, credit card consolidation can help reduce the financial clutter, but few solutions are really one-size-fits-all, and there may be times when debt consolidation isn’t the best option. One example is when you have the good credit score needed to qualify for an introductory balance transfer APR offer that gives you a better rate than a consolidation loan can.

Similarly, consolidation will be little help in situations when your credit simply won’t qualify for a loan with a lower interest rate than you’re already being charged by your credit cards. In this case, you may need to focus on paying down your debt levels and improving your credit score to qualify for a better rate in the future.

Ashley Dull is the Finance Editor at Digital Brands, Inc., where she oversees content published on CardRates.com and BadCredit.org. Ashley works closely with experts and industry leaders in every sector of finance to develop authoritative guides, news and advice articles with regards to audience interest.