January 24, 2023

Consolidating credit cards: What you need to know

Discover how consolidating credit cards could help simplify your debt.

If you're like most Americans, you have at least one credit card. They can be a great way to build your credit history and earn rewards.

But they can also become a huge burden if you wind up struggling to make payments. If you're feeling overwhelmed by your credit card debt, you may want to consider consolidation.

Credit card consolidation combines multiple credit card balances into one single payment. The goal is to simplify your monthly payments, reduce your interest rate or both.

There are several ways to consolidate your credit cards. Options include balance transfers, consolidation loans and debt management plans. Each method has its own pros and cons, so it's important to choose the right option for your situation.

Understanding credit card consolidation

If you're struggling to keep up with multiple credit card payments each month, consolidating your debt could be a good solution.

By combining all of your outstanding balances into one monthly payment, you can simplify your budget and could save money on interest charges.

Plus, consolidating your debt may help improve your credit score by reducing your credit utilization ratio. And, if you choose a consolidation loan with a lower interest rate than what you're currently paying on your credit cards, you'll also save money on interest charges.

However, it's important to consider all of your options before consolidation, as well as any potential risks. For example, if you consolidate your debt with a home equity loan, you could lose your home if you're unable to make the payments.

Options for card consolidation

Balance transfer: A balance transfer is when you transfer the balance of one credit card to another, typically one with a lower interest rate. Be aware that balance transfers can come with fees. Plus, you will probably have a limited time to pay off the transferred balance before the interest rate goes up.

Consolidation loan: A consolidation loan is a personal loan that you use to pay off your credit card debt, usually at a lower interest rate.

Debt management plan: A debt management plan is a formal agreement between you and your creditors to pay off your debt over time. It’s usually administered by a debt management company, and you'll have to make payments to the debt management company directly. To be noted, not all creditors will agree to a debt management plan. Note that managing debt this way may impact your credit score. There’s more information at the National Foundation for Credit Counseling.

Deciding on credit card consolidation

Credit card consolidation can be a great way to get out of debt, but it's important to choose the right option for your financial situation. Consider factors such as how much debt you have, what kind of interest rates you're currently paying and whether you're struggling to make ends meet each month.

Be sure to stop using your credit cards as much as possible during this time, or you may find yourself paying off both a debt consolidation loan and new credit card debt.

You can also work with a credit counselor or talk to a financial advisor who can help you assess the options and weigh the pros and cons. Once you've considered all of the factors discussed here, you'll be ready to choose the consolidation method that's right for you.

This page and the information contained herein is for educational purposes only. The information is not intended to provide legal, investment, or financial advice or to indicate the availability or suitability of any product, service, or strategy to your unique circumstances. For specific advice about your unique circumstances, you may wish to consult a qualified professional. Any links to other websites are included for your convenience only. Bread Financial does not endorse any product or service, and is not responsible for the accuracy or reliability of the information, made available through such sites.