Is a Credit Card the Best Way to Consolidate Debt?

Considering that American consumers currently carry $3.8 billion in overall debt, it’s not surprising if you find yourself buried under a mountain of bills. Credit cards and personal loans can quickly add up to a mountain of debt.

To dig out of debt and make your way to financial freedom, you might be considering consolidating all of your outstanding debt with one credit card. Here’s a look at the pros and cons of doing so.

Benefits of consolidating debt with a credit card

Pulling all of your debt under the umbrella of a credit card has various benefits, including the following:

  • Save on interest

Consolidating debt can give you significant savings on interest. For instance, if you have a personal loan at 8%, a credit card at 20% and another card at 24%, and you consolidate the balances on a 0% interest rate card for a year, you’ll save a substantial amount in interest. Even if you consolidate all of this debt under a credit card at 7%, you’ll still be ahead.

  • Simplify matters and pay off debt faster

Managing various types of debt and remembering to pay them all on time can be time-consuming and confusing. When you consolidate, you only have one payment to remember each month. This also enables you to pay off debt faster, especially if you consolidate onto a credit card with a 0% Introductory rate.

  • Potentially elevate your credit score

Having a bunch of credit cards and loans can cause you to have a high credit utilization ratio, which can negatively impact your credit score. By paying off various cards and loans and consolidating under one credit card, you’ll reduce your credit utilization ratio, which should cause your credit score to improve.

  • Earn added rewards

If you choose a card that offers rewards of some sort, such as cash back or airline credit, and you put a large amount of money on the card in order to consolidate, you’ll open yourself up to increased rewards. You could end up earning yourself an overseas trip or a large cash back credit on your next statement.

  • Avoid damaging your credit

When you consolidate, you make it more likely that you won’t miss a payment or rack up late charges. Missed or late payments are especially damaging to your credit score, so doing whatever you can to avoid these is important.

Drawbacks of consolidating debt with credit cards

There are some cons to putting all of your debt onto a credit card. Check these drawbacks out before deciding to consolidate debt with a credit card.

  • More limited options

You’ll need a good to excellent credit score of 700+ to qualify for many of the best credit card offers that feature a 0% introductory rate or low percentage rate. If you’ve paid your current loans and credit cards late or missed payments, your score is probably not going to be high enough to qualify you for credit cards that will enable you to come out ahead.

It’s not a good idea to consolidate your debt under a credit card with interest that is higher than the average of all of your debt. Doing this may give you one monthly payment, but it will put you into deeper debt and is likely to result in it taking even longer to pay off the debt.

  • Temptation to use paid-off cards

Often, you’ll have credit cards with zero balances after you consolidate. This can present tempting options to use those cards. If you do this, you’ll end up digging yourself into an even deeper debt hole. Keep in mind that it’s best not to take on any more expenses before you pay off your consolidated debt.

It’s wise to have a payoff plan for your consolidated debt and make sure to stick to it. This will allow you to pay off the debt in as speedy a manner as possible so that you can reach your goal of gaining financial freedom.

  • Pay-off deadline

When you use a 0% introductory rate credit card, you only have between six to 24 months to pay off the card before you’ll have to start paying what is likely to be a high, double-digit interest rate. This means that for the consolidation and debt payoff to work, it’s important to have your debt paid off or at the very least paid down substantially before the introductory rate expires. If you don’t do this, you could end up owing much more than you did before consolidating.

  • Can ding your credit score

A card that is maxed out because you used it for your consolidated debt can lead to a high utilization ratio, which can result in a dip in your credit score. If you’re paying off other credit cards during the process, which raises your credit score, it could end up a wash.

  • Extra fees

There are fees associated with transferring debt to a credit card, including balance transfer fees. Check the fine print before consolidating your debt into one credit card.

Bottom line

Credit cards can be an excellent way to consolidate debt if you can qualify for low APRs or, even better, a long 0% APR introductory rate. However, there are drawbacks to consider, such as fees and potential damage to your credit score. Other alternatives to consider are debt consolidation loans and — in extreme cases where you can’t afford the payments — debt settlement programs.

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