Credit Card Consolidation: How Does It Work and What are Its Biggest Risks?

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Credit Card Consolidation: How Does It Work and What are Its Biggest Risks?

The prospect of consolidating credit card payments into a single, manageable payment each month is appealing – as is eliminating high interest rates. Credit card consolidation is, in fact, the best debt relief option for many consumers. But before diving in, it’s important to not only analyze your specific debt burden but also understand the intricacies of how the process works and its risks.

How It Works

In short, credit card consolidation is a debt relief solution that enables consumers to restructure their payments. Typically, this involves combining your credit card balances into a single amount, leaving you with one monthly payment that you will make to your debt relief company or credit counselor. 

The consolidation can be done through a balance transfer, by working with a reputable debt relief agency, or by taking on a debt consolidation loan to pay down your high-interest debts. Each option has positives and drawbacks. For instance, a balance transfer involves shifting your balances to another credit card. While this option may carry lower interest rates, it is advisable that you maximize your payments as much as possible as the lower interest rate is only available for a few months.

The benefits of credit card consolidation go beyond the obvious: simplifying your debt payment schedule and streamlining your payoff process. In fact, in many cases, a debt relief program will lower your monthly interest rate and work with you to find a monthly payment amount that is feasible for your budget. In other words, debt relief agencies can tend to be much more flexible and forgiving than credit card companies. Not to mention, engaging a debt relief company to negotiate with your creditors on your behalf can help you score lower interest rates overall, saving you some money (at least on interest) in the short term.

However, there are certain drawbacks as well. Not only does this option not reduce your overall debt load (you still, ultimately, owe the same amount of money!) but there are hurdles and consequences to consider before taking the plunge.

The Risks

When choosing your debt solution, keep in mind that there is no simple answer. Each option carries pros and cons, benefits and risks. And when it comes to credit card consolidation, there are certainly risks involved. These shouldn’t deter you from pursuing it, but they should encourage you to take an honest inventory of your financial situation to determine whether it is the best option for you.

#1: It doesn’t solve the underlying debt problem.

Resolving your debt is great, but without taking a deep dive into your financial health and spending habits, you may end up right back in the same position in the near future. Resist the temptation to consolidate your debt to simply clean your slate, then dive right back into the same harmful habits that got you into debt in the first place.

#2: If your credit is bad, you may be saddled with another high interest rate.

If you have a poor credit score, be prepared to get a higher interest rate than you would if you had a strong credit history. Your debt relief agency can negotiate on your behalf to attempt to lower your rate, but don’t expect to save as much in interest over time.

#3: It can encourage you to use more credit.

Once you embark on a path to resolving your credit card debt, you may feel comfortable putting other items on credit. Be careful not to grow complacent: If you stumble back into your old spending habits, you might end up contending with more debt than ever.

#4: It can cost you in the long run.

Don’t focus exclusively on your monthly payment – this option may cost you more long-term, even if it frees up some extra space in your monthly budget. Even if you score a lower interest rate, extending your repayment timeline may have you paying more in interest than you would’ve had you knocked out your debts more quickly.

How Credit Card Consolidation Can Help You Get out of Debt

Before you settle on a course, know your options. Balance transfers, consolidation loans, and debt management programs are all beneficial in different ways – and each financial situation is different. In addition to taking stock of your options and your financial health, here are a few other factors to consider:

  • Your budget – How much can you afford to pay each month? How will you manage your other monthly expenses while you pay down your debt? Is there a way you can slash nonessential expenses to maximize your debt payments?
  • Your credit score – Your credit score will help you narrow down your options. For example, some of the options that require a stronger credit score – like a consolidation loan or home equity loan – may be off the table for you, while debt management may be a viable solution for almost anyone.
  • Your financial goals – Are you planning to make a large purchase in the near future? Are you hoping to strengthen your credit score? If so, select a strategy that won’t compromise your credit history.
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