When you have several different credit cards, each with🉐 a hefty balance and high annual percentage rate (APR), getting out of debt can feel like🔜 a challenge. A credit card consolidation loan combines all your high-interest credit card debts into one loan with one monthly payment.
Credit card consolidation can even help you get out of debt fasꦫter, so it’s good to understand exactly what it is 𝓀and how it works.
- How credit card consolidation loans work
- Qualifying for a consolidation loan
- How to get this type of loan
- Advantages of credit card consolidation loans
- Disadvantages of consolidation loans
- Frequently asked questions
How credit card consolidation loans work
A credit card consolidation loan is a personal loan you use to pay off your existing credit card debt. This way, you don’t have to worry about multiple due dates each month for various credit cards. You repay credit card consolidation loans in fixed monthly installments, typically with a fixed interest rate.
You may want to use a loan to pay down your credit card debt🐼 because it simplifies the repayment process, can potentially lower the amount of interest yo♏u pay, and gives you a clear picture of when your debt will be paid off. And unlike with a credit card balance transfer, you can avoid a balance transfer fee.
Just keep in mind that credit card consolidation loans can come with fees, too — for example, some lenders charge an origination fee to process your loan. An origination🗹 fee is typically a percentage of your loan amount (usually 0% to 10%), and it’s subtracted from🌄 your loan up front.
How to qualify for a credit card consolidation loan
Eligibility requirements vary by lender, but to qualify for a credit card consolidation loan, most will usually want to see th🎐at you have: 𒁏;
- Sufficient income: Some lenders have minimum income requirements, while others just want to see that you have some form of income. You’ll usually need to provide documentation, like pay stubs or W-2s.
- Suitable debt-to-income (DTI) ratio: Your DTI ratio is your total monthly debt payments divided by your gross monthly income, expressed as a percentage. Lenders want to know that you can afford to repay the loan and still have funds left to cover your necessities. A good DTI ratio is usually 43% or lower. If you have $2,000 in monthly debt payments and a monthly income of $5,000, your DTI ratio is 40% (2,000/5,000 = 0.4).
- A good credit history: A good or excellent credit score (670 or above) shows lenders that you’re responsible with credit and will repay your debt in a timely manner. But even if you don’t have great credit, there are personal loans for fair credit. Be sure to look at a lender’s minimum credit score requirements if it discloses this information.
How to get a credit card consolidation loan
You’ll generally need to follow these steps to get a credit card consolidation loan:
- Decide how much you need to borrow. Add up your balances by checking each credit card statement or account. Remember, if a lender charges an origination fee, it’ll be subtracted from your loan amount. Factor this in as you decide how much to borrow.
- Check your credit score. Some credit card companies and financial institutions allow you to check your credit score for free. You can also get a free copy of your credit reports weekly from through the end of 2023.
- Compare rates. Platforms like Credible let you compare consolidation lenders in minutes so you can find the right fit for you. When you’re comparing lenders, consider factors like loan amounts, repayment terms, fees, discounts, and lender reputation.
- Fill out the application. Once you’ve determined which loan is the best for you, you’ll need to complete an application. Many lenders let you apply online, and some will even let you know if you’re approved the same day. You can also apply through your bank, credit union, though you may have to go to a branch in person.
- Receive your funds. If the lender approves your loan application, you’ll either receive the funds in your bank account, or the lender will pay off the credit card companies directly. Don’t forget to make payments to your new lender — setting up autopay can help if you tend to forget due dates.
What are the advantages of credit card consolidation loans?
If you’ve got a lot of credit card debt and need help p꧒aying it off, credit card consolidation lo𝓰ans offer a lot of benefits, including:
- One monthly payment
- Potentially lower interest rate, if you have good credit (or a cosigner)
- Fixed rate and repayment term for cost certainty
- Faster debt payoff, potentially
- Improve your credit with on-time payment
What are the disadvantages of credit card consolidation loans?
Cre🅷dit card consolidation loans aren’t fo🙈r everyone, and they do have some drawbacks:
- Might not qualify for a lower rate (if you don’t have good credit)
- Potentially more interest charges if you choose a long loan term
- Fees, such as for originating the loan or late payments
- Might not fix your spending habits — especially if you continue to rack up charges on your credit cards
- Negative impact to your credit score, thanks to the hard credit check when you apply
Credit card consolidation frequently asked questions
Here are the answers to a few of the most commonly asked questions about consolidating credit card debt.
What’s the difference between credit card refinancing and debt consolidation?
Refinancing and consolidation are two terms that mean essentially the same thing: takin🐼g out a new loan (with more favorable terms) to pay off your existing debt.
Refinancing usually focuses on snagging a lower interest rate for a single debt, while consolidation is focused on combining all of your debts into one. But the ideal end resܫult is the same: a new loan with one low🗹er monthly payment.
How will credit card consolidation affect my credit score?
Credit card consolidation can affect yᩚᩚᩚᩚᩚᩚᩚᩚᩚ𒀱ᩚᩚᩚour cred🐭it in a couple ways.
- At first, it may lower your credit score as the lender runs a hard credit check. These hard inquiries tend to cause a temporary dip in your credit score, but it should be minor.
- A new loan also might lower your score because recently opened accounts reduce the overall age of your accounts. The length of your credit history accounts for 15% of your FICO credit score.
On the positive side, a credit card consolidation loan should boost your credit score over the long term, especially if you make consistent on-time payments. A credit card consolidation loan can also diversify your credit mix (the types of accounts you have open). Your credit mix makes up 10% of your FICꦛO credit score.
What are some alternatives to credit card consolidation?
If a credit card consolidation loan isn’t the right fit for you, you have other options, such as:
- Balance transfer credit card: You could apply for a balance transfer card with a 0% APR introductory rate. This means you’ll have a set period (sometimes up to 21 months) when you can make payments without interest. You may have to pay a balance transfer fee, which is typically a percentage of the balance you’re transferring, so calculate whether this option is worth it or not.
- Home equity loan or line of credit: Both options use your home as collateral for a loan with fixed payments or a line of credit (which works similarly to a credit card). Keep in mind that these can be riskier options, since you could lose your home if you don’t repay the loan or line of credit.
- Payment plan: You can speak with your credit card companies directly. They might work out a payment plan that will help you pay down your balance.
- Credit counseling: If your situation is out of control, consider credit counseling. This can help you manage your credit card use and devise a plan to move forward. A good place to start is any nonprofit agency approved by the National Foundation for Credit Counseling or the Financial Counseling Association of America.
No matter which solution you choose, paying down high-interest debt is a smart move. Find the bes𒊎t terms so you can save money along the way.