Credit Card Consolidation

The term “credit card consolidation” sounds like a solution to all your credit card problems. But what exactly does it mean. It can refer to many different products or services.  If a friend mentioned they consolidated their cards into one monthly payment, it remains unclear what they did. But they likely did one of the two things: obtained a loan or enrolled onto some sort of debt program.

There are four main products or services regarding credit card consolidation. Obviously there are pros and cons with each of them.

Let’s say you have 4 credit cards carrying a balance of $10,000 on each of them. And your average APR is 21%. Consolidating your credit cards intrigues you. But it also scares you to try something you don't understand. So let’s explain how these four different options can help you.

Debt Consolidation Loan

The most common of the credit card consolidation options is a debt consolidation loan. This is when a financial institution gives you a loan in the amount equal to or near the total balances of your outstanding credit card debt. A debt consolidation loan combines multiple debts into a single loan which can simplify finances for some people. Most personal loans generated today are for debt consolidation.

Now with your $40K of credit card debt, you are hoping for a loan to pay off your balance. So you apply for a debt consolidation loan for $40K and get approved. The bank then pays each of your creditors in full. But the bank charges a 5% origination fee which comes out to $2,000. As a result your total loan amount is now $42,000.

Pros of a Debt Consolidation Loan

• Instead of 4 payments to make each month, you only have one.
• You likely have a lower interest rate.
• Your four credit cards are paid off.
• Your debt will be paid off faster.

Cons of a Debt Consolidation Loan

• Your overall total debt amount went up due to the origination fee.
• Credit score may have been lowered due to hard credit pull and higher debt amounts.
• The root of your problem (overspending) hasn’t been fixed. You may be tempted to start using these cards again. Especially with the balances being zero.
• Requires good credit and bank approval.

Advice: Negotiate the origination fee down as close as you can to 1%. Avoid using credit cards in the future. Make sure the interest rate is lower that what your credit card are. Do the math on the total payoff amount. For example, $800 monthly payment for 60 months = $48,000. That make sense if your total debt is $40K.

Best companies offering this service: Best Egg, Sofi, Discover, Any Credit Union or Bank

0% Balance Transfer

Perhaps the most enticing of the four options is the Balance Transfer. After all, you can’t have a better interest rate than the zestful 0%! Many people with good credit play the zero percent game. Meaning once the zero percent interest rate expires, it’s time to transfer to another lender. So they repeat this process until the offers run dry.

The balance transfer is very similar to the debt consolidation loan as your balances get transferred from multiple banks to just one lender.  As a result, your headache of making multiple payments and juggling multiple due dates is gone. You now just have the one payment, one due date and an incredibly low rate of 0%. Well, the zero percent is temporary. Usually after 12-18 months, the rate skyrockets above 20%.

Similarly to a debt consolidation loan, you can expect a loan origination fee. So tack on another 3-5% to your current balance. Using the same example of $40K in credit card debt, expect your balance to go up to $42,000.

Pros of 0% Balance Transfer

• Instead of 4 payments to make each month, you only have one.
• You have a lower interest rate. You can attack your debt significantly during the 12-18 months
• Your four credit cards are paid off.

Cons of 0% Balance Transfer

• Your overall total debt amount went up due to the origination fee.
• The APR is temporary, and your rates will increase shortly.
• The root of your problem (overspending) hasn’t been fixed. You may be tempted to start using these cards again. Especially with the balances being zero.
• Requires good credit and bank approval.
• Unlike a debt consolidation loan, there is no payoff date in sight.

Advice: Negotiate the origination fee down as close as you can to 1%. Avoid using credit cards in the future. Take advantage of the zero percent and make the largest payments possible to pay off your debt.

Best Companies offering this service: Bank of America, Chase Bank, Wells Faro, American Express, Citibank

Credit Counseling

Also known as a Debt Management Program, this is probably the least known of the four options. Credit Counseling is done by a nonprofit organization, not the banks. A certified credit counselor reviews all your debts, your monthly income and expenses. Furthermore, they provide you a recommended action plan. In some cases, they will recommend enrolling onto their debt management program.

A Debt Management Program will typically reduce your monthly payments and interest rates. In 2024, the average client of DebtWave saw their monthly payment lowered $200 and their interest rates reduced to 6.81%. Unlike Debt Settlement, the balance is not reduced nor negotiated. Clients will pay off 100% of their balance plus minimal interest.

You make one monthly payment to the credit counseling agency via ACH. And they disburse payments to your creditors. The debt remains with your creditors except with a much lower interest rate. Additionally, you will see the balances go down much quicker.

Pros of Credit Counseling

• Instead of multiple payments to make each month, you only have one.
• You typically have a lower interest rate and a lower payment.
• Credit typically remains in good standing as long as payments are made on time.
• Debt usually gets paid off in 3-5 years.
• Receive expert advice on budgeting to help prevent overspending from happening in the future.

Cons of Credit Counseling

• Your accounts are closed and you can’t use the cards enrolled on the program.
• Credit Counseling agencies charge monthly fees
• Combining all your payments into one monthly debit may be burdensome to your budget depending on your payroll schedule

Advice: If you get paid semi-monthly or bi-weekly, ask the agency if they can debit half the payment at a time. This will eliminate the burden of a large amount taken out monthly. Understand that there is about a 10-15 day delay from the time your account gets debited and when your creditors receive the payment. Make sure you keep your accounts current during the enrollment process. Change your due dates to match their schedule.

Best Companies offering this service: DebtWave, Greenpath, Consolidated Credit, Take Charge America

Debt Settlement (aka Debt Forgiveness)

Sometimes referred to as Debt Negotiation or Debt Forgiveness, this is probably the most misunderstood of the four options. Debt settlement is the process where a for profit company negotiates the total balance with your creditors. Creditors typically reduce the debt to 30-50% in exchange for a lump sum payment today!

Many people that enroll onto this plan focus on the benefits of the lower payment and quick payoff timeframe. After all, this plan undoubtedly offers the lowest monthly payment of the four options. However, that benefit comes with some headaches. In order for your creditors to reduce the balance owed, you need to fall severely delinquent with your accounts. And we are not talking just a few days delinquent. Unfortunately, you will need to fall months and months behind to the point where your credit score is obviously shattered.

Debt settlement also has tax consequences. The amount of debt forgiven will be considered taxable income. You can expect the IRS to come knocking right away. You also have the possibility of getting sued by your creditors which can possibly lead to wage garnishment if the settlement isn’t made in time.

Pros of Debt Settlement Consolidation

• Low monthly payment
• Debt free in 2-4 years
• Pay back less than what you owe

Cons of Debt Settlement Consolidation

• Credit score will get worse
• Tax Consequences
• Possible lawsuits & wage garnishment
• Debt Settlement companies charge fees. Usually between 15-25% of your total debt

Advice: Avoid Debt Settlement unless you can't afford the payment on your own nor can you afford the payment on Credit Counseling. Understand the damage it will do to your credit. Negotiate the companies fees down as close to 15% as you can. Consider doing this on your own.

Best Companies offering this service: Freedom Financial Network, Accredited Debt Relief, National Debt Relief, Pacific Debt