What is the Best Way to Consolidate Credit Card Debt?

Credit card debt is an issue for many Americans and their families. Monthly credit card payments can put the squeeze on your budget and even prevent you from getting approved for a mortgage or a car loan.

Our Addition Financial members often ask us about the best way to consolidate credit card debt. There are multiple options, although the best option for any one person will depend upon the amount of debt they have, their income and a variety of other factors. With that in mind, here’s what you need to know about how to consolidate credit card debt.

What is considered high credit card debt?

The average American carries about $6,000 in credit card debt as of 2022, but how much credit card debt is too much? The answer depends on a variety of factors including your income and other debt obligations.

There are three ways to evaluate your debt and help you decide if your debt is too high:

  1. Debt-to-income ratio. Lenders use the DTI to evaluate an applicant’s creditworthiness. You can calculate your DTI by dividing your total monthly debt payments by your gross monthly income. Most lenders want to see a DTI of less than 43%. 
  2. Credit utilization. Credit utilization is a metric that indicates how much of your available credit you use. It’s responsible for 30% of your FICO score. You can calculate your credit utilization by taking your total credit card balances and dividing them by your total available credit. Most experts say that it’s best to use no more than 30% of your available credit, although some recommend utilization as low as 10%.
  3. Credit card debt ratio. It’s never a good idea to have so much credit card debt that a significant percentage of your income is required to keep up with minimum payments. You can calculate your credit card debt ratio by adding your total monthly credit card payments and dividing the total by your net monthly income. We recommend having a credit card debt ratio of no more than 10%.

If you calculate these ratios and find that your results are at the high end of the spectrum, it’s a good indication that you have high credit card debt. Of course, individual circumstances may vary. Someone could have a 9% credit card debt ratio and still struggle to make monthly payments, so remember to do a gut check as well. If you feel like you have too much debt, you probably do.

How much debt do you need to consolidate?

One of the questions we are asked most frequently has to do with the amount of credit card debt needed for debt consolidation. The answer may surprise you.

The truth is that there is no minimum amount of debt required for credit card debt consolidation although you may run into limitations on the maximum depending on what method of debt consolidation you choose.

People consolidate debt with less than $500 of debt and it may be advantageous to do so if your debt is on credit cards with high interest rates. If you can qualify for a balance transfer credit card or a debt consolidation loan at a rate that’s lower than what you’re paying, consolidating even a small amount of debt can be a smart choice.

How does your credit score affect credit card debt consolidation?

As you might expect, your FICO score has an impact on what credit card debt consolidation options are available to you. Your FICO score is based on your credit payment history, credit utilization and other factors.

What credit score is required for a debt consolidation loan?

Credit score requirements for debt consolidation loans may vary from lender to lender. Most lenders will not approve a personal loan for anybody with a credit score below 580, which is in the fair range. 

Your chances of being approved for a debt consolidation loan improve if your credit score is 660 or higher, which would be squarely in the range of good credit. You’re also likely to qualify for a more advantageous interest rate if your credit score is good.

What credit score is required for a balance transfer credit card?

Balance transfer credit cards often advertise low introductory rates. The cost of qualifying for those low rates is having a good-to-excellent credit score.

Many credit card issuers require a minimum FICO score of 670 to qualify for a low interest rate balance transfer card. However, there are exceptions, with some credit unions being willing to work with members to help them consolidate their credit even if their FICO score is less than perfect.

What are the advantages and disadvantages of consolidation?

Debt consolidation is the right choice for some people and not for others. The answer depends on many factors, including how much debt you have, your credit history and your income. Here are some of the most important pros and cons of debt consolidation.

Advantages of debt consolidation

Let’s start with the advantages of debt consolidation:

  • You’ll have one monthly payment. It can be stressful and time-consuming to make multiple credit card payments each month. If you consolidate your debt, you’ll have just one monthly payment to make.
  • You can get out of debt quickly. In many cases, debt consolidation allows people to get out of debt more quickly than they would without consolidation. 
  • Your interest rate will be lower with consolidation. Most credit card APRs tend to be higher than APRs for debt consolidation loans and introductory rates for balance transfer cards, which means you can save money in the long run.
  • You can improve your credit score. While debt consolidation will lead to a slight dip in your credit score thanks to the hard credit inquiry required for approval, paying off your debt more quickly can improve your credit score.

If you can qualify for debt consolidation, the benefits can be substantial and it can help you get out of debt and improve your credit score.

Disadvantages of debt consolidation

There are some potential cons of debt consolidation to consider as well:

  • Up-front costs will initially add to your debt. Most balance transfer credit cards charge a transfer fee between 2% and 5% of the transferred amount. (Addition Financial’s Platinum Low Rate Card does not charge a transfer fee.) All debt consolidation loans come with closing costs in the same range, typically between 3% and 5% of the loan amount. Your credit utilization may increase if you choose a balance transfer card that charges a fee.
  • Your interest rate may not be lower if your credit is bad. Typically, you’ll need good-to-excellent credit to qualify for a low introductory rate. If you don’t qualify, you may end up with a higher interest rate than what you’re currently paying.
  • There’s a significant risk involved with late payments. Late payments on a balance transfer credit card may nullify your introductory rate and lead to additional interest charges. There’s also a risk associated with late payments on a debt consolidation loan.
  • It won’t address underlying money issues. Many people who consolidate debt fail to address the underlying financial issues that led to them being in debt in the first place. Debt consolidation should be combined with a debt management plan for the best results.

In general, if your credit score is low or you’re unsure that you can make monthly payments on time, you may be better off paying down your debt with a debt repayment plan instead of consolidating.

credit card debt consolidation infographic

What is the best way to consolidate credit card debt?

There’s no one “best” way to consolidate credit card debt because every situation is unique. That said, here are some pointers that may help you decide which debt consolidation method is right for you:

  • Check your credit score. If your score is between 580 and 669, then you can probably qualify for a debt consolidation loan. If your score is 670 or higher, then a balance transfer card with a low interest rate may be an option.
  • Create a budget. Budgeting is essential because it can help you figure out how much money you can put toward debt repayment each month. Even if you consolidate your debt, adopting an accelerated repayment plan will help you get out of debt faster than you would if you made only minimum payments.
  • Evaluate interest rates. You may have some credit card balances that already have low interest rates and in some cases, consolidating those debts may not be the best choice. You should consolidate only if you can reduce your interest rate.
  • Do the math. It’s always a good idea to figure out the total amount you’ll pay with each option. For example, you might pay substantially less with a low introductory rate balance transfer card than you would without consolidation, provided you pay your debt before the introductory period is over.
  • Read the fine print on everything. If you opt for a balance transfer card, make sure you understand how long the introductory rate applies, how much you’ll pay to transfer your balance, and what the interest rate will be after the introductory rate ends. With a debt consolidation loan, make sure you know how much the closing costs will be, what the interest rate is, and whether there’s a penalty for early repayment.

If you can qualify for a balance transfer card and you think you can pay off your debt before the introductory period ends, that option may be your best bet—particularly if you can find a card that doesn’t charge a balance transfer fee.

Affordable debt consolidation with Addition Financial Credit Union

Credit card debt consolidation can help make your monthly finances less stressful and allow you to get out of existing debt more quickly than would be possible without consolidation. The key is to crunch the numbers to be sure you understand your financial obligations before you consolidate.

Are you looking for an affordable way to consolidate your credit card debt? Addition Financial Credit Union can help! Click here to read about our Signature Loans and begin the application process today.

The content provided here is not legal, tax, accounting, financial or investment advice. Please consult with legal, tax, accounting, financial or investment professionals based on your specific needs or questions you may have. We do not make any guarantees as to accuracy or completeness of this information, do not support any third-party companies, products, or services described here, and take no liability or legal obligations for your use of this information.