Credit Card Consolidation: Is It Right for You?

Before you consolidate, take a look at the interest terms on any offer you have to be sure you’ll actually save money.

How much do you owe on your credit cards? If you're keeping up with the Jonses, it's probably several thousand dollars across a few cards -- Americans carry, on average, about $6,194 in credit card debt, and have four active credit cards in their wallet [source: White]. In 2022, U.S. consumers collectively charged $790 billion to their plastic [source: Debt.org].

One of the most popular ways to consolidate all that credit card debt is to transfer balances from multiple existing accounts to one new credit card. It's an attractive solution because it's relatively quick to do and can have a positive and immediate impact on your debt. While your goal is to save yourself a little money every month, and maybe streamline your monthly bill payments, credit card companies want to make money -- so there are a few things to know as you select the right balance transfer offer.

Only a portion of each monthly payment you make on your credit card balance is applied to the principal; you're also paying interest, and sometimes a lot of interest. Interest rates can make a significant impact on how big your monthly payments are and the length of time it will take to pay off the debt -- therefore, interest rates are the first thing to consider in the consolidation equation.

Your credit card's interest rate is also called an annual percentage rate (APR), and these rates can be fixed or variable. When evaluating balance transfer offers, be sure to select a new card with a lower interest rate than what you're currently paying, otherwise you're not saving any money. At all. And be aware that the attractive zero-percent offer is often only for a limited, introductory time, called a teaser rate (and it might be only applicable to the debt you transfer, not any new purchases you put on the card -- those purchases may be subject to a much higher interest rate). In addition to understanding the interest rate, look at more of the details of the deal: Does the card, for example, have an application fee, an annual fee, or services charges? The smartest card choice doesn't have any of these fees (although you may not be able to escape paying a transfer fee). Make sure you understand the limitations of the offer before you decide whether the card is right for your needs.

Balance Transfer Offers and Your Credit Score

Another thing to consider when you're thinking about consolidating credit cards with balance transfers is how you're impacting your overall credit rating. Consolidating your revolving debt may give your credit score a boost or it may lower it -- it depends on what you do with your old credit cards and something called your credit utilization ratio.

Your credit score, or FICO score, is what lenders use to help determine how responsible you are with your money and how risky it would be to lend to you; the higher your credit score number, the lower the risk of lending to you. While this number is determined by a number of variables, a few things are certain: The amount of money you owe in relation to your available credit matters -- this is called your credit utilization ratio. For example, let's say you have three credit cards, each with a $15,000 limit. You carry $5,000 on each card, for a total of $15,000 of debt and a $45,000 available credit limit. If you transfer your $15,000 debt onto a new credit card with a $20,000 limit and close your old credit cards, your credit score may actually drop. Why? Your credit utilization ratio has changed. While the amount you owe hasn't changed, your line of available credit has decreased, and that new ratio makes you appear more of a risk to lenders.

While you don't have much input into how big the offered credit line on your new card will be, you do have control over what happens to your old, now unused accounts. Keep those accounts open but unused and you won't negatively impact your available credit limit or, in turn, your credit utilization ratio.

Ultimately, though, if you crunch the numbers and find you won't be able to pay off the balance you transferred during the low or zero percent time frame on a new low-interest card, then a balance transfer may not be the right solution for your money-saving goals. Let's talk about some other options, next.

Additional Credit Card Debt Consolidation Options

There’s more than one way out of credit card debt. When considering consolidation, look at other options, such as a home equity line of credit or an unsecured line of credit.

Balance transfers aren't the only available option for consolidating credit card debt. For some, consolidating credit card debt into a debt consolidation loan or rolling credit card debt into another loan, such as a home equity loan, home equity line of credit (HELOC), or an unsecured line of credit (ULOC) may be more sensible -- or more feasible, as the best balance transfer offers are usually reserved for people with very good credit scores.

Balance transfers move your debt from credit card to credit card, but in the end it's still credit card debt, and credit card debt is considered unsecured debt. Unsecured debt means that there is nothing held as collateral. Secured debt, on the other hand, basically means that you borrowed money against something. Your mortgage, for example, is secured debt; if you default on your mortgage payments the bank can place a lien against or foreclose on your house. There are pluses and minuses to rolling credit card debt into a secured loan. For example, while you may be able to claim the interest on your home equity loan as a tax deduction, which is a plus, if you have trouble paying the loan, you risk losing your home, which falls squarely in the minuses.

Debt consolidation loans may be a good solution for those looking to consolidate all of their unsecured debt, including credit card debt and store card debt, into one secured loan. Debt consolidation loans usually offer a lower, more manageable monthly payment schedule but they come with a price, literally -- that lower monthly payment is usually a result of a longer payment period, which may mean you'll end up paying more overall.

In the end, no solution is perfect -- within two years of opening a loan as the solution to paying credit card debt, 70 percent of us will find ourselves with the same or more debt [source: McCune]. Alternatively, and if it fits your budget, instead of consolidating credit card debt focus on your payments: Make every payment on time, pay more than the minimum payment if possible, and pay down the card with the highest interest rate first to make the biggest impact.