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Consolidation of Credit Card Debt

Reasons to Consolidate Credit Card Debt

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When To Consider Consolidating Credit Card Debt

Owning a credit card brings an array of advantages. It makes payments easier and more convenient, and it qualifies you for payment installment programs in retail stores, allowing you to buy big-ticket items for your home. On top of that, if you use credit responsibly, you will be able to build up your credit score. This makes it easier for you to apply for loans and mortgages in the future and get lower interest rates.

For all its benefits, though, owning a credit card also comes with some significant risks. Failing to make repayments on time will require you to face hefty interest payments on the amount you spent.

What if you failed to make repayments on multiple credit cards? Is there a way for you to get out of your debt? If you are struggling to pay off your debt across multiple credit cards, you may want to consider consolidating them.

What Credit Card Consolidation Is and How It Works

Credit card consolidation is the process of consolidating two or more credit card debts into a single debt. Basically, you either need to work with a nonprofit credit counseling organization, like Money Fit, to consolidate your debt through a Debt Management plan, or you will need to take out a new loan in order to pay off your outstanding credit card debt. This way, you’ll only have to focus on one creditor and don’t have to worry about multiple payments and deadlines.

You have different options when it comes to consolidating your credit card debt. Each of them has its own advantages and risks. You must carefully assess them one by one before selecting the option that can work for you.

Ways to Consolidate Credit Card Debt

Some of the best ways to consolidate your credit card debt are by applying for credit card refinancing, taking out a personal loan, signing up for a debt management plan, withdrawing from your 401(k), and tapping into your home equity. Read on to know more about these options.

Credit Card Refinancing or Balance Transfer

With credit card refinancing, you will be able to transfer all your debt to a single balance transfer credit card. A good thing about this is that banks typically offer a 0% annual percentage rate (APR) for these cards during the introductory period, which may last up to 18 months. This means you will only need to pay for the amount transferred, possibly saving you hundreds or thousands of dollars throughout the introductory period.

However, qualifying for credit card refinancing is quite difficult. Banks typically only approve balance transfer credit cards for those people who have excellent credit scores. If your credit is not too spectacular, you are less likely to qualify for this debt consolidation option.

Since the 0% APR is only valid during the introductory period, make sure that you can pay the repayments in full after the introductory period. Once you’re past that, you will be subject to regular credit card interest rates.

Credit card refinancing also typically requires a one-time fee in order to transfer the outstanding debt to your new credit card. The fee is about 3% to 5% of the total debt to be transferred. Depending on the amount of your debt, these could be several hundred dollars or more. Before signing up for this, evaluate whether it can really lower the amount you pay over time.

Personal Loan

Applying for a personal loan is also a good option to consider if you want to consolidate your credit card debt. What’s good about this loan is that it’s often unsecured, which means that you don’t have to pledge collateral. It’s an ideal loan option for people who don’t have an asset that they can pledge.

As expected, this loan comes with a fixed interest rate, which will be based on how good your credit is. If you still manage to have a good credit score in spite of your debt, you may be able to score a lower interest rate. However, if your credit is poor, taking out a personal loan is not advisable. You may be required to pay high-interest rates, making this option worse than the alternatives.

To apply for a personal loan, you can go to a bank, credit union, or online lender. Try to find the lender that can give you the lowest interest rates. That way, you’ll have a structured repayment plan that won’t be difficult to settle.

Debt Management Plans

If you can’t qualify for other debt consolidation options due to bad credit, then you can consider debt management plans. Aside from its accessibility signing up for a debt management plan can also lower your interest rates and waive certain fees.

You will need to reach out to a credit counseling agency in order to sign up for a debt management plan. They will work with you and help you come up with a plan that can help you pay off your credit card debt. They will even negotiate with your creditors to get the ideal terms for you, allowing you to save money on interest.

With a debt management plan to help you, you will only need to pay one fixed monthly repayment to the credit counseling agency. They will be the ones to distribute your payment to your creditors.

However, it may take around three to five years before you can completely repay your debt. In exchange for their services, credit counseling agencies will ask for modest startup fees and monthly repayments as well.

401(k) Loan

If you can’t qualify for a bank loan, another option you have is to take out a 401(k) loan. Though not an advisable move, withdrawing from your 401(k) will help you consolidate and pay your credit card debt.

401(k) loans usually offer lower interest rates, which can save you a huge amount of money in the long run. Aside from that, this loan won’t appear on your credit report, so it will not impact your credit score. However, its advantages end there.

Ideally, no one should touch their retirement fund until the right time comes. Withdrawing from your 401(k) can reduce your payments during retirement. Moreover, if you fail to make the repayments on time, the penalty fees will be significant. This leaves you struggling with more debt.

You also need to keep yourself employed throughout the validity of the loan. If you left your job or were laid off, you will be required to pay immediately—typically within a 60-day period.

Home Equity Loan

Homeowners who want to consolidate their credit card debt can tap into home equity. It can offer you lower interest rates since it’s secured. It’s easy to qualify as well. As long as you own a home, you may be able to take out a loan on your home’s equity.

Another good thing about taking out a home equity loan is that it usually gives you lengthy repayment terms. This makes settling your debt more manageable and makes the monthly payments more affordable.

The biggest disadvantage of a home equity home is that your property will act as collateral. This means in the case that you fail to make the required monthly repayments, the lender has the authority to repossess your property.

Another risk that comes with taking out home equity loans is the additional fees that you need to pay. Lenders typically charge annual fees for this loan. Moreover, they may charge you with closing costs, which can be up to 5% of the total amount you borrowed.

Pros and Cons of Credit Card Consolidation

While it provides some benefits for people who are struggling to repay their debts, credit card consolidation is not a perfect solution. It also comes with some risks that you must be aware of. Before you apply or sign up for any credit card debt consolidation options, make sure that you fully understand what you are getting into. That way, you won’t put yourself into an even bigger financial pitfall.

Pros of Credit Card Consolidation

If you are looking for an efficient way to pay your multiple credit card debts easily, credit card debt consolidation is a great choice. Here are some of the good reasons why you should do this:

Simplified Payments

By consolidating your credit card debt, you won’t have to worry about your multiple due dates. You only need to make one repayment each month. This makes it easier for you to manage your finances and make payments on time. You will have a fixed repayment schedule, so you know exactly how much you need to pay and when the payment is due.

Lower Interest Rates

One of the biggest reasons people consolidate their credit card debt is to decrease the interest rate they need to settle. This perk is more beneficial for those with better credit scores since they will qualify for lower interest rates.

Fast Way to Repay Debt

Credit card consolidation allows you to get out of debt sooner, which means you will pay less interest overall. Consolidating your debt will require you to make a fixed payment every month, so you know exactly when the loan will be settled.

Cons of Credit Card Consolidation

If you’re not too careful, credit card consolidation may just leave you with more debts to pay. Here are some risks that come with credit card consolidation:

Upfront and Recurring Costs

Credit card debt consolidation loans require you to pay different fees. Some of the fees the lender may charge you are origination fees, balance transfer fees, closing costs, recurring annual fees, and more. Aside from choosing the lender that can give you the lower interest rate, figure out which lender charges the fewest and most affordable upfront and recurring costs.

Missed Payments

If not handled properly, credit card debt consolidation can set you back even further financially speaking. When you fall behind on your payments, you could rack up late payment fees, increasing your borrowing costs. Your lender will also report missed payments to the credit bureaus, which can damage your credit scores.

Losing Your Collateral

Pledging collateral is required for a home equity loan and sometimes for personal loans as well. However, this makes debt consolidation risky as there is a possibility that you lose your pledged property if you aren’t able to settle the loan on time.

Should You Consolidate Your Credit Card Debt?

Whether to consolidate your credit card debt or not depends on your unique circumstances. If you are struggling to pay your outstanding credit card debts but qualify for take out a loan, you could consider credit card debt consolidation.

However, this option is not always the best scenario for everyone. Credit card debt consolidation programs also come with serious risks. You need to make sure that when you sign up for one, you will be able to handle its terms. If not, you may end up in deeper financial trouble than before.

It’s also important to remember that consolidating credit card debt does not guarantee that you won’t encounter this issue again in the future. You must make sure that after this experience you’ll be wiser with your spending habits and more responsible when paying them off. That way, you won’t have to consolidate any credit card debt again.

About the Author

Picture of Rick Munster

Rick Munster

Rick Munster is a personal finance expert and author with over 21 years of experience in the credit counseling industry. He currently serves on the board of directors for the Financial Counseling Association of America and has written over 200 articles on personal finance. Rick's expertise has been recognized by several prominent online organizations, which have quoted him on issues related to credit counseling, debt management, and financial education. With more than 20 years of experience at Money Fit, a non-profit credit counseling organization, Rick has established himself as a trusted authority in the field of personal finance.
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6213 N. Cloverdale Rd, Suite 130, Boise, ID 83713
Money Fit is a nationwide nonprofit 501(c)(3) organization. We do not lend money.

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You hereby authorize and instruct Debt Reduction Services, Inc. (DRS, dba Money Fit by DRS) and/or its assigned agents to:
  • Obtain and review your credit report, and
  • Request verifications of your income and rental history, and any other information deemed necessary for improving your housing situation (for example, verifying your annual property tax obligations and homeowner’s insurance fees)
Your credit report will be obtained from a credit reporting agency chosen by DRS. You understand and agree that DRS intends to use the credit report evaluate your financial readiness to purchase or rent a home and/or to engage in post-purchase counseling activities and not to grant credit. You understand you may ask any questions pertaining to your credit report. However, while DRS will review the information with you, the company is not able to furnish you with a copy of your credit profile. You hereby authorize DRS to share your information from your credit report and any information that you provided (including any computations and assessments produced) with the entities listed below to help DRS determine your viable financial options.
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  • Counseling Agencies
  • Debt Collectors
  • Landlords
  • Lenders
  • Mortgage Servicers
  • Property Management Companies
  • Public Housing Authorities
  • Social Service Agencies
Entities such as mortgage lenders and/or counseling agencies may contact your DRS counselor to evaluate the options for which you may be eligible. In connection with such evaluation, you authorize the credit reporting and/or financial agencies to release information and cooperate with your DRS counselor. No information will be discussed about you with entities not directly involved in your efforts to improve your housing situation. You hereby authorize the release of your information to program monitoring organizations of DRS, including but not limited to, Federal, State, and nonprofit partners for program review, monitoring, auditing, research, and/or oversight purposes. In addition, you authorize DRS to have your credit report pulled two additional times to conduct program evaluations. You also agree to keep DRS informed of any changes in address, telephone number, job status, marital status, or other conditions which may affect your eligibility for a program you have applied for or a counseling service that you are seeking. Finally, you understand that you may revoke consent to these disclosures by notifying DRS in writing.

Client Privacy, Data Security, and Client Rights Policy

NOTE: This sheet is to inform new or returning clients about our services, records, fees, and limitations that may affect you as a consumer of our services. This form also discloses how we might release your information to other agencies and/or regulators. If you do not understand a statement, please ask a Debt Reduction Services (DRS) counselor for assistance.

Debt Reduction Services, Inc. (DRS) has put into place policies and procedures to protect the security and confidentiality of your nonpublic personal information. This notice explains our online information practices and how we use and maintain your information to conduct our financial education and credit counseling sessions and to fulfill information and question requests. This privacy policy complies with federal laws and regulations.

To provide our financial education and credit counseling services, we collect nonpublic personal information about you as follows: 1) Information we receive from you, 2) Information about your transactions with us or others, and 3) Information we receive from your creditors or a consumer reporting agency. We do not share this information with outside parties.

We use non-identifying and aggregate information to better design our website and services, but we do not disclose anything that could be used to identify you as an individual.

You hereby authorize DRS, when necessary, to share your nonpublic personal, financial, credit, and any information that you provided (including any computations and assessments produced) with the following entities in order to help DRS provide you with appropriate counseling or guide you to appropriate services: third parties such as government agencies, your lender(s), your creditor(s), and nonprofit housing-related and other financial agencies as permitted by law, including the U.S. Department of Housing and Urban Development.

To prevent unauthorized access, maintain data accuracy, and ensure the correct use of information, we have put in place appropriate physical, electronic, and managerial procedures to safeguard and secure the information we collect online. We limit access to your nonpublic personal information to our employees, contractors and agents who need such access to provide products or services to you or for other legitimate business purposes.

Debt Reduction Services, Inc. complies with the privacy requirements set forth in the HUD housing counseling agency handbook 7610.1 (05/2010), including the sections 2-2 Mc, 3-1 H(2), 3-3, 5-3 F, and Attachment A.5. At all times, we will comply with all additional laws and regulations to which we are subject regarding the collection, use, and disclosure of individually identifiable information.

  1. Services: DRS provides the following housing-related services: counseling that includes Homeless Assistance, Rental Topics, Pre-purchase/Homebuying, and Home Maintenance and Financial Management for Homeowners (Non-Delinquency Post-Purchase); Education courses that include Financial literacy (including home affordability, budgeting, and understanding use of credit), Predatory lending, loan scam or other fraud prevention, Fair housing, Rental topics, Pre-purchase homebuyer education, Non-delinquency post-purchase workshop (including home maintenance and/or financial management for homeowners), and other workshops not listed above.

Please refer to DebtReductionServices.org for details of our services.

  1. Limits: Our services are limited to our normal weekday business hours. We do not provide individual counseling or education services after hours or on weekends, although our education courses are available 24/7.
  2. Fees: We do not charge fees for our financial management counseling and education. However, if you use them, you may have to pay for our Debt Management Program, Student Loan Counseling, Bankruptcy Certificate Services or certain financial education courses (homebuyer education, rental topics, fair housing, predatory lending, and post-purchase-non-delinquency including home maintenance and/or financial management for homeowners).
  3. Records: We maintain records of the services you receive, including notes about your progress or other relevant information to your work with us. You have the right to access and view your records by making a request to your counselor.
  4. Confidentiality: We respect your privacy and offer our services in confidence with the understanding that we may share such information with auditors and government regulators. Certain laws or situations may also lead to disclosing confidential issues, such as those involving potential child abuse or neglect, threats to harm self or others, or court subpoenas.
  5. Refusal of Services: You have the right to refuse services without any penalty or loss.
  6. Disclosure of Policies and Practices: You will be provided our agency disclosure statement.
  7. Sharing of Information: Sometimes we will need to contact other agencies or we may need to share your information, including your records, with other agencies or with regulators. We will do this only if you sign this form that gives us permission except for limited reasons; please see # 5 above for examples of such situations.
  8. Other: You have the right to be treated with respect by our staff, and we expect the same from you in return. We encourage you to always ask questions if something is not clear. We also encouraged you to express your thoughts and advocate throughout our services.

You acknowledge that this authorization will remain in effect for the duration of time that DRS serves as your housing counselor or financial education provider. You also acknowledge that should you wish to terminate this authorization, you will notify DRS in writing.

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NOTE: If you have an impairment, disability, language barrier, or otherwise require an alternative means of completing this form or accessing information about our counseling services, please communicate with your DRS representative about arranging alternative accommodations.

Program Disclosure Form

Disclosure to Client for HUD Housing Counseling Services

Debt Reduction Services, Inc. and its financial education arm, Money Fit by DRS, offer the following housing counseling and educational services related to housing, personal finance, and bankruptcy certificates to consumers:
  • Housing Education Courses: DRS offers many online self-guided education programs classified as Financial, Budgeting, and Credit Workshops (FBC), Fair Housing Pre-Purchase Education Workshops (FHW), Homelessness Prevention Workshops (HMW), Non-Delinquency Post Purchase Workshops (NDW), Predatory Lending Education Workshops (PLW), Pre-purchase Homebuyer Education Workshops (PPW), and Rental Housing Workshops (RHW). These courses help participants increase their knowledge of and skills in personal finance, including home affordability, budgeting, and understanding the use of credit, as well as predatory lending, loan scams, and other fraud prevention topics, fair housing, rental topics, pre-purchase homebuyer education, non-delinquency post-purchase topics including home maintenance and/or financial management for homeowners, homeless prevention workshop, and other workshops not listed above relating to personal finance and housing. Course details are found below under “Housing Workshops.”
  • Home Equity Conversation Mortgage (HECM) Counseling (RMC): Via telephone and virtual platforms, we offer the required HECM counseling nationwide in addition to in-person counseling in Boise, Idaho. We also offer in-home counseling options in thirty counties across southern Idaho for an additional fee to cover our travel and additional staff time costs.
  • Home Maintenance and Financial Management for Homeowners (Non-Delinquency Post-Purchase) (FBC): Clients receive counseling and materials on the proper maintenance of their home and mortgage refinancing. Clients can find help and resources by phone, in our Boise office, or virtually on all topics related to stabilizing their long-term homeownership.
  • Services for Homeless Counseling (HMC): Clients receive phone, virtual, or in-person (Boise) counseling to evaluate their current housing needs, identify barriers to and goals for housing stability, establish a path to self-sufficiency, and connect with emergency shelters, income-appropriate housing, and/or other community resources (e.g. mental healthcare, job training, transportation, etc.).
  • Pre-Purchase Counseling (PPC): Clients receive counseling through the entire homebuying process. Assistance may involve creating a sustainable household budget, understanding mortgage options, building their credit rating, and putting together a realistic action plan to set and achieve homeownership goals.  Additionally, clients will receive materials and resources about home inspections and other homeownership topics relevant to successfully maintaining a home.
  • Rental Housing Counseling (RHC): Via phone, in-person appointments (Boise, ID), or virtual platforms, clients receive housing counseling relevant to renting, including rent subsidies from HUD or other government and assistance programs. Topics can also address issues and concerns having to do with fair housing, landlord and tenant laws, lease terms, rent delinquency, household budgeting, and finding alternate housing.
DRS also offers the following services:
  • A Debt Management Program (DMP) for consumers struggling to pay their credit cards, collections, medical debts, personal loans, old utility bills, and past-due cell phone accounts;
  • The Budget Briefing and Debtor Education Certificates that are required during the Bankruptcy filing process;
  • A Student Loan Repayment Plan Counseling and application service.

Relationships with Industry Partners

Through such services, DRS has established financial relationships with hundreds of banks, credit unions, and creditors such as American Express, Bank of America, Barclays, Capital One, Chase, Citibank, Credit One, Discover, Synchrony, US Bank, USAA, Wells Fargo, and others.

No Client Obligation

The client is not obligated to receive, purchase or utilize any other services offered by DRS or its exclusive partners to receive financial education or housing counseling services. Alternatives: As a condition of our counseling services, in alignment with meeting our client services goals, and in compliance with HUD’s Housing Counseling Program requirements, we may provide information on alternative services, programs, and products available to you, if applicable and known by our staff. Alternative DMP services include negotiating better repayment terms directly with your individual creditors, paying your debts as agreed, or, in extreme cases, filing for personal bankruptcy. Alternative credit and education services can be found through MyMoney.gov or the Jump$tart Clearinghouse of online financial education resources. Housing counseling alternatives can be found through HUD at www.hud.gov/findacounselor.
Finally, you understand that you may revoke consent to these disclosures by notifying DRS in writing.
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Housing Counseling and Education Fee Schedule

 

Online Education Program Fees*

Homebuyer Education Course: $59 per participant

  • Self-paced course available here, our online housing counseling and education center. Certificates will be automatically generated upon completion of the course (approximately 6-8 hours)

Rental, Fair Housing, Predatory Lending / HOEPA, Post-Purchase (Non-delinquency post-purchase workshop, including home maintenance and/or financial management for homeowners) Online Workshops: $49 per participant

  • Approximately 1 hour each

Other Self-Guided Financial Literacy Webinars (e.g. credit, budgeting, homeless prevention, debt prevention): $0

One-on-one Counseling Fees*

Pre-purchase Homebuying Counseling, Rental Counseling, Post-purchase Ownership Maintenance and Financial Management: $75

  • Session by the hour

Reverse Mortgage/HECM Counseling with Required Certificate:

  • $200†

Credit Report Fee: Paid Directly by Client

*Fees for all but our online education courses and workshops can be paid online by debit card, credit card, or PayPal or in person by cash, check or money order to: “Debt Reduction Services, Inc.” Registration fees are non-refundable 24 hours or less before the start of an in-person course or workshop. Certificates are non-transferable

*Fees may be waived for households with income of 150% or less of that identified on the US Department of Health and Human Services Poverty Guidelines Page

†Home visit counseling is available in 30 southern Idaho counties for potential HECM borrowers at additional costs to cover our travel (IRS reimbursement rates apply) and staff time ($50 per hour or fraction there).

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Housing Counseling and Education Fee Schedule

 

Online Education Program Fees*

Homebuyer Education Course: $59 per participant

  • Self-paced course available here, our online housing counseling and education center. Certificates will be automatically generated upon completion of the course (approximately 6-8 hours)

Rental, Fair Housing, Predatory Lending / HOEPA, Post-Purchase (Non-delinquency post-purchase workshop, including home maintenance and/or financial management for homeowners) Online Workshops: $49 per participant

  • Approximately 1 hour each

Other Self-Guided Financial Literacy Webinars (e.g. credit, budgeting, homeless prevention, debt prevention): $0

One-on-one Counseling Fees*

Pre-purchase Homebuying Counseling, Rental Counseling, Post-purchase Ownership Maintenance and Financial Management: $75

  • Session by the hour

Reverse Mortgage/HECM Counseling with Required Certificate:

  • $200†

Credit Report Fee: Paid Directly by Client

*Fees for all but our online education courses and workshops can be paid online by debit card, credit card, or PayPal or in person by cash, check or money order to: “Debt Reduction Services, Inc.” Registration fees are non-refundable 24 hours or less before the start of an in-person course or workshop. Certificates are non-transferable

*Fees may be waived for households with income of 150% or less of that identified on the US Department of Health and Human Services Poverty Guidelines Page

†Home visit counseling is available in 30 southern Idaho counties for potential HECM borrowers at additional costs to cover our travel (IRS reimbursement rates apply) and staff time ($50 per hour or fraction there).