Credit card consolidation and debt consolidation are essentially the same thing: You take on a new debt at more favorable terms to pay off the old ones.
There are many ways to consolidate your credit card and other debts, and taking out a personal loan is just one of them. Most consolidation methods can be done on your own, and they don’t damage your credit if you make your payments on time.
To decide which option is right for you, ask yourself a few questions:
Is my debt load manageable?
No: If you’re deep in debt and know you won’t have enough cash flow to pay it off over several years, then you should seek credit counseling or consider filing for bankruptcy, says NerdWallet personal finance columnist Liz Weston. “The benefit of these options is that you stop struggling with debt that ultimately may not be payable,” Weston says.
Credit counselors can help you create a debt management plan and work with your creditors to have some of your debt forgiven. The average monthly cost of counseling is $24, according to a 2014 survey of member agencies in the National Foundation for Credit Counseling.
Filing for bankruptcy lets you erase your debt, but it typically stays on your credit report for 10 years and affects your ability to get loans or new forms of credit. In some cases, though, it may be the only long-term option to rebuild your finances.
Yes: If you think you can successfully manage your debt, then ask yourself a few more questions:
- Can I pay off the debt in six months to a year? If you can, it may not be worth the time and effort to consolidate. You might end up paying a few extra bucks of interest, but probably not much more than that if the debt can be paid off that quickly.
- Can I get a lower interest rate on my current debt just by asking? You can always try calling up your credit card companies and requesting a lower interest rate. If you’ve been a longtime customer and have paid your bills on time, you stand a chance.
- Am I serious about paying off the debt? Consolidation works best as part of a larger plan to become debt-free, not just as a way to buy some breathing room.
Once you’ve decided that consolidation is the way to go, your options depend on your credit profile.
Debt consolidation options for good credit
A person with a good credit score (690 or above) has several options to pay off credit card debt and can get better interest rates and terms on a consolidation loan than someone with less-than-perfect credit.
- 0% balance transfer credit cards: If you have good credit, you may qualify for a 0% APR credit card. Then you can transfer your balance over to it. This method works best if you have a plan to pay off your debt within the 0% promotional period, which is typically 12 to 18 months. If not, then you are just moving your debt problem around instead of facing it.
- Home equity line of credit: Homeowners can take out a HELOC on the value of their home and receive a low variable interest rate in return. Keep in mind that this is a secured loan, which means that your house is on the line if you don’t keep up with payments. And HELOCs typically require interest-only payments during their initial years — so you’ll need to pay more than the minimum to make a dent in your overall debt.
- Debt consolidation loans: A personal loan taken from your bank, credit union or an online lender may give you a lower interest rate on your credit card debt. If you have good credit, you can shop around at different online lenders without affecting your credit score (most will give you a rate without a “hard inquiry” on your credit, unlike banks and credit unions). Pick the one that gives you the best combination of interest rate, fee structure and payment options.
Debt consolidation for average credit
For those with average credit scores, between 630 and 689, a HELOC or a personal loan can be good options.
If you have time — a few months at least — you may be able to improve your credit score enough to qualify for a 0% credit card offer or a better rate on a personal loan or HELOC. That means avoiding late payments, reducing how much of your available credit is used, or removing negative items from your credit report.
Debt consolidation for bad credit
A bad credit score doesn’t mean you cannot get a personal loan. There are online lenders that accept low scores and some that look at nontraditional factors such as your profession and college major in addition to your credit score.
You will still get a higher interest rate on your debt consolidation loan than someone with good credit would. But even the highest rate on a personal loan (36%) from mainstream lenders — that is, those that consider credit history — is better than the rate you’d get on a no-credit-check installment loan or worse yet, a payday loan, for which annual interest rates can exceed 400%.
A personal loan may improve your credit score by changing credit card debt to installment loan debt. The way credit scores are figured, borrowers who use all or most of the available credit on their cards get hit with a significant penalty.
Regular, on-time payments on a personal loan can help your score as well.
Compare best personal loans and rates
If you decide to get a personal loan:
- Gather the information you’ll need to shop around for a loan. (See “How to Get an Unsecured Personal Loan.”)
- Compare rates from local banks, credit unions and online lenders. (See “Where to Get a Personal Loan.”) Don’t simply choose the lowest interest rate — consider fees and payment flexibility as well.
- Read reviews and comparisons of online personal loan providers. Lending requirements vary tremendously, and some companies may look at more than just your credit score and income.
More from NerdWallet:
Personal Loans: Compare Best Rates and Lenders
What’s a Good Interest Rate on a Person Loan?
Amrita Jayakumar is a staff writer at NerdWallet, a personal finance website. Email: ajayakumar@nerdwallet.com. Twitter: @ajbombay
This post updated Feb. 2, 2016. It originally published Oct. 25, 2015.
Image via iStock.
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